Price Elsaticicty of Demand

Topics: Consumer theory, Supply and demand, Giffen good Pages: 1 (333 words) Published: May 18, 2013
Price elasticity of demand (PED or Ed) is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (ceteris paribus, i.e. holding constant all the other determinants of demand, such as income). Price elasticities are almost always negative, although analysts tend to ignore the sign even though this can lead to ambiguity. Only goods which do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. Some types of luxury goods, such as high-end wines, designer handbags, and luxury cars, are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high-status products.[2] Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable. Often such goods are no better or are even worse than their lower priced counterparts. However, this 'anomaly' is mitigated when one understands that the demand curve does not necessarily have only one peak. The goods generally thought to be Veblen goods are still subject to the curve since demand does not increase with price infinitely. Demand may go up with price within a certain price range, but at the top of that range the demand will cease to increase before it begins to fall again with further price increases. At the other end of the spectrum, where luxury items priced equal to non-luxury items of lower quality, all else being equal more people would buy the luxury items, even though a few Veblen-seekers would not. Thus, even a Veblen good is subject to the dictum that demand moves conversely to price, although the response of demand to price is not consistent at all points on the demand curve.
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