Price elasticity of demand (PED) is a measure of how much the quantity demanded changes when there is a change in the price of the product. It can be calculated using the formula:
PED= Percentage change in Qd of the product/ Percentage change in price of the product. When determining the price elasticity of demand, there are many possible outcomes which range from zero to infinity. If the PED value is between zero and one, then elasticity is said to be “Inelastic”, meaning there would be less response or change in quantity demanded when there is a change in the price of a product. On the other hand, if the PED value is between 1 and infinity, then elasticity is said to be “elastic”, which means that the quantity demanded will fall significantly when the price of the product is raised. There are many different determinants of price elasticity of demand. The first determinant is the number and closeness of substitutes. We can say that the demand of a product would be more elastic if there are more substitutes. It would also be more elastic if the substitutes are closer and more available to the consumers. Another determinant of price elasticity of demand is the necessity of the product and how widely the product is defined. If we look at specific products more closely, such as a specific brand of a product, we would expect the demand to be more elastic as there are other alternatives (other brands of the same product) available for the consumers if the price of one branded product rises. Finally, the third determinant of price elasticity of demand is the time period consumer. Because it takes time for consumers to adapt to new consumption and purchasing habits, change in the price of a product would cause the PED to very slowly become more elastic over a period of time. In other words, the consumer would need more time to find alternative goods/ substitutes.
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