Price Elasticity of Demand (PED) and Income Elasticity of Demand (YED)
This page provides a comprehensive overview of Price Elasticity of Demand (PED) and Income Elasticity of Demand (YED), two crucial concepts in economics that significantly impact business strategies. The information is presented in a clear, structured manner, making it accessible for students and business professionals alike.
Price Elasticity of Demand (PED)
PED is defined as the measure of how responsive demand is to changes in price. The formula for PED is given as:
Formula: PED = % change in demand / % change in price
The concept of elasticity is further explained through graphical representations, showing elastic and inelastic demand curves.
Definition: Elastic demand occurs when the percentage change in quantity demanded is greater than the percentage change in price. Inelastic demand is when the percentage change in quantity demanded is less than the percentage change in price.
Factors affecting PED are listed, including:
- Product differentiation
- Competition and availability of substitutes
- Proportion of consumer income spent on the product
- Timescale for consumer consideration
- Branding and brand loyalty
Highlight: Understanding PED allows firms to predict the effect of price changes on quantity demanded and total revenue, and to develop appropriate pricing strategies.
Income Elasticity of Demand (YED)
YED measures how responsive demand is to changes in income. The formula for YED is presented as:
Formula: YED = % change in demand / % change in income
The page outlines factors affecting YED:
- Type of good
- Who buys the product
- Positive and negative elasticity
Example: Normal goods have a positive YED (YED > 0), luxury goods have a YED > 1, and inferior goods have a negative YED (YED < 0).
The significance of YED for businesses is explained, including:
- The importance of producing normal goods as consumer incomes rise
- The potential protection offered by inferior goods during recessions
- The need to balance product offerings based on income elasticity
Highlight: Businesses can use YED to plan sales strategies, particularly during economic fluctuations. For instance, retailers might focus on selling own-brand goods during recessions.
The page concludes by discussing the implications of low and high income elasticity on business stability and forecasting. It emphasizes that while low income elasticity products offer more stable demand, businesses should also invest in higher income elasticity products for long-term growth and profitability.
