Price Elasticity of Demand (PED)

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What is Price Elasticity of Demand (PED)?

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Price elasticity of demand is the responsiveness of quantity demanded for a good to a change in its price. It is measured by the equation: % change in Qd / % change in P.

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How is PED value interpreted?

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The value of PED is normally negative because of the law of demand. A PED value greater than 1 indicates price elastic demand, a value of 1 indicates unitary elasticity, and a value less than 1 indicates price inelastic demand.

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What does a PED value greater than 1 signify?

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A PED value greater than 1 signifies price elastic demand, meaning a change in price leads to a proportionately greater change in quantity demanded.

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What does a PED value of 1 signify?

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A PED value of 1 signifies unitary elasticity, meaning for every 1% change in price, the quantity demanded changes by 1%.

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What does a PED value less than 1 signify?

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A PED value less than 1 signifies price inelastic demand, meaning a change in the price of a good leads to a less than proportionate change in quantity demanded.

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What are the determinants of price elasticity of demand?

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Determinants include the number and closeness of substitutes, whether the good is a luxury or necessity, the proportion of income spent on the good, the type of consumer, and time.

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How does the number of substitutes affect PED?

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The greater the number of close substitutes a product has, the more price elastic its demand tends to be because consumers can easily swap between alternatives when the price changes.

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How do luxury and necessity goods differ in terms of PED?

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Necessity goods tend to be more price inelastic because consumers need to keep buying them even when prices increase. Luxury goods tend to be more price elastic because consumers do not need to keep consuming them when prices increase.

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How does the proportion of income affect PED?

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Goods that account for a smaller proportion of household income tend to be more price inelastic, while those that account for a larger proportion tend to be more price elastic.

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How does time affect PED?

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Over time, PED tends to become more price elastic because consumers can alter their consumption patterns in response to a price change.