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| '''Price elasticity of demand''' ('''PED''' or '''E<sub>d</sub>''') is a measure used in economics to show the responsiveness, or ], 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 (holding constant all the other determinants of demand, such as income). It was devised by ]. | |||
| DICK HEAD | |||
| 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 ], such as ] and ]s, have a positive PED. In general, the demand for a good is said to be ''inelastic'' (or ''relatively inelastic'') when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be ''elastic'' (or ''relatively elastic'') when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. | |||
| Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the ] on that good. Various research methods are used to determine price elasticity, including ]s, analysis of historical sales data and ]. | |||
| ==Definition== | |||
| PED is a measure of the sensitivity (or responsiveness) of the quantity of a good or service demanded to changes in its price.<ref name="Png57">Png, Ivan (1999). p.57.</ref> The formula for the coefficient of price elasticity of demand for a good is:<ref>Parkin; Powell; Matthews (2002). pp.74-5.</ref><ref name="Gillespie43">Gillespie, Andrew (2007). p.43.</ref><ref name="Gwartney425">Gwartney, James D.; Stroup, Richard L.; Sobel, Russell S. (2008). p.425.</ref> | |||
| :<math>E_d = \frac{\%\ \mbox{change in quantity demanded}}{\%\ \mbox{change in price}} = \frac{\Delta Q_d/Q_d}{\Delta P/P}</math> | |||
| The above formula usually yields a negative value, due to the inverse nature of the relationship between price and quantity demanded, as described by the "law of demand".<ref name="Gillespie43"/> For example, if the price increases by 5% and quantity demanded decreases by 5%, then the elasticity at the initial price and quantity = −5%/5% = −1. The only classes of goods which have a PED of greater than 0 are Veblen and Giffen goods.<ref name="Gillespie2007">Gillespie, Andrew (2007). p.57.</ref> Because the PED is negative for the vast majority of goods and services, however, economists often refer to price elasticity of demand as a positive value (i.e., in ] terms).<ref name="Gwartney425"/> | |||
| ''' conform to the ], such as ] and ]s, have a positive PED. In general, the demand for a good is said to be ''inelastic'' (or ''relatively inelastic'') when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be ''elastic'' (or ''relatively elastic'') when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded. | |||
| This measure of elasticity is sometimes referred to as the ''own-price'' elasticity of demand for a good, i.e., the elasticity of demand with respect to the good's own price, in order to distinguish it from the elasticity of demand for that good with respect to the change in the price of some other good, i.e., a ] or ].<ref name="Png57"/> The latter type of elasticity measure is called a ].<ref>Ruffin; Gregory (1988). p.524.</ref><ref>Ferguson, C.E. (1972). p.106.</ref> | |||
| Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the ] on that good. Various research methods are used to determine price elasticity, including ]s, analysis of historical sales data and [[Conjoint analysis (in marketing)|conjoint an | |||
| As the difference between the two prices or quantities increases, the accuracy of the PED given by the formula above ''decreases'' for a combination of two reasons. First, the PED for a good is not necessarily constant; as explained below, PED can vary at different points along the ], due to its percentage nature.<ref>Ruffin; Gregory (1988). p.520</ref><ref>McConnell; Brue (1990). p.436.</ref> Elasticity is not the same thing as the slope of the demand curve, which is dependent on the units used for both price and quantity.<ref name="parkin75"/><ref>McConnell; Brue (1990). p.437</ref> Second, percentage changes are not symmetric; instead, the ] between any two values depends on which one is chosen as the starting value and which as the ending value. For example, if quantity demanded increases ''from'' 10 units ''to'' 15 units, the percentage change is 50%, i.e., (15 − 10) ÷ 10 (converted to a percentage). But if quantity demanded decreases ''from'' 15 units ''to'' 10 units, the percentage change is −33.3%, i.e., (15 − 10) ÷ 15.<ref name="Ruffin">Ruffin; Gregory (1988). pp.518-519.</ref><ref name="Ferguson">Ferguson, C.E. (1972). pp.100-101.</ref> | |||
| Two alternative elasticity measures avoid or minimise these shortcomings of the basic elasticity formula: ''point-price elasticity'' and ''arc elasticity''. | |||
| === Point-price elasticity === | |||
| One way to avoid the accuracy problem described above is to minimise the difference between the starting and ending prices and quantities. This is the approach taken in the definition of ''point-price'' elasticity, which uses ] to calculate the elasticity for an infinitesimal change in price and quantity at any given point on the demand curve: <ref name="sloman">Sloman, John (2006). p.55.</ref> | |||
| :<math>E_d = \frac{P}{Q_d}\times\frac{dQ_d}{dP}</math> | |||
| In other words, it is equal to the absolute value of the first derivative of quantity with respect to price (dQ<sub>d</sub>/dP) multiplied by the point's price (P) divided by its quantity (Q<sub>d</sub>).<ref name="Wessels2000">Wessels, Walter J. (2000). p. 296.</ref> | |||
| In terms of partial-differential calculus, point-price elasticity of demand can be defined as follows:<ref>Mas-Colell; Winston; Green (1995).</ref> let <math>\displaystyle x(p,w)</math> be the demand of goods <math>x_1,x_2,\dots,x_L</math> as a function of parameters price and wealth, and let <math>\displaystyle x_l(p,w)</math> be the demand for good <math>\displaystyle l</math>. The elasticity of demand for good <math>\displaystyle x_l(p,w)</math> with respect to price <math>p_k</math> is | |||
| :<math>E_{x_l,p_k} = \frac{\partial x_l(p,w)}{\partial p_k}\cdot\frac{p_k}{x_l(p,w)} = \frac{\partial \log x_l(p,w)}{\partial \log p_k}</math> | |||
| However, the point-price elasticity can be computed only if the formula for the ], <math>Q_d = f(P)</math>, is known so its derivative with respect to price, <math>{dQ_d/dP}</math>, can be determined. | |||
| === Arc elasticity === | |||
| A second solution to the asymmetry problem of having a PED dependent on which of the two given points on a demand curve is chosen as the "original" point and which as the "new" one is to compute the percentage change in P and Q relative to the ''average'' of the two prices and the ''average'' of the two quantities, rather than just the change relative to one point or the other. Loosely speaking, this gives an "average" elasticity for the section of the actual demand curve—i.e., the ''arc'' of the curve—between the two points. As a result, this measure is known as the '']'', in this case with respect to the price of the good. The arc elasticity is defined mathematically as:<ref name="Ferguson"/><ref name="wall">Wall, Stuart; Griffiths, Alan (2008). pp.53-54.</ref><ref name="McConnell; Brue">McConnell;Brue (1990). pp.434-435.</ref> | |||
| :<math>E_d = \frac{\frac{P_1 + P_2}{2}}{\frac{Q_{d_1} + Q_{d_2}}{2}}\times\frac{\Delta Q_d}{\Delta P} = \frac{P_1 + P_2}{Q_{d_1} + Q_{d_2}}\times\frac{\Delta Q_d}{\Delta P}</math> | |||
| This method for computing the price elasticity is also known as the "midpoints formula", because the average price and average quantity are the coordinates of the midpoint of the straight line between the two given points.<ref name="Ruffin"/><ref name="McConnell; Brue"/> However, because this formula implicitly assumes the section of the demand curve between those points is linear, the greater the curvature of the actual demand curve is over that range, the worse this approximation of its elasticity will be.<ref name="wall" /><ref>Ferguson, C.E. (1972). p.101n.</ref> | |||
| ==History== | |||
| ] | |||
| Together with the concept of an economic "elasticity" coefficient, ] is credited with defining PED ("elasticity of demand") in his book '']'', published in 1890.<ref>Taylor, John (2006). p.93.</ref> He described it thus: "And we may say generally:— the elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price".<ref>Marshall, Alfred (1890). III.IV.2.</ref> He reasons this since "the only universal law as to a person's desire for a commodity is that it diminishes... but this diminution may be slow or rapid. If it is slow... a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case... the elasticity of his wants, we may say, is great. In the latter case... the elasticity of his demand is small."<ref>Marshall, Alfred (1890). III.IV.1.</ref> Mathematically, the Marshallian PED was based on a point-price definition, using differential calculus to calculate elasticities.<ref>Schumpeter, Joseph Alois; Schumpeter, Elizabeth Boody (1994). p. 959.</ref> | |||
| == Determinants == | |||
| The overriding factor in determining PED is the willingness and ability of consumers after a price change to postpone immediate consumption decisions concerning the good and to search for substitutes ("wait and look").<ref name="Negbennebor, Microeconomics 2001">Negbennebor (2001).</ref> A number of factors can thus affect the elasticity of demand for a good:<ref name="parkin">Parkin; Powell; Matthews (2002). pp.77-9.</ref> | |||
| * '''Availability of ]s:''' the more and closer the substitutes available, the higher the elasticity is likely to be, as people can easily switch from one good to another if an even minor price change is made;<ref name="parkin"/><ref name="illinois"/><ref name=GoodwinNelsonAckermanWeisskopf>Goodwin, Nelson, Ackerman, & Weisskopf (2009).</ref> There is a strong substitution effect.<ref>Frank (2008) 118.</ref> If no close substitutes are available the substitution of effect will be small and the demand inelastic.<ref>Frank (2008) 118.</ref> | |||
| * '''Percentage of income:''' the higher the percentage of the consumer's income that the product's price represents, the higher the elasticity tends to be, as people will pay more attention when purchasing the good because of its cost;<ref name="parkin"/><ref name="illinois">{{cite web|url=http://www.ilstu.edu/~mswalber/ECO240/Tutorials/Tut04/Tutorial04a.html|title=Tutorial 4a|first=Mark|last=Walbert|accessdate=27 February 2010}}</ref> The income effect is substantial.<ref>Frank (2008) 119.</ref> When the goods represent only a negligible portion of the budget the income effect will be insignificant and demand inelastic,<ref>Frank (2008) 119.</ref> | |||
| * '''Necessity:''' the more necessary a good is, the lower the elasticity, as people will attempt to buy it no matter the price, such as the case of ] for those that need it.<ref name="parkin75"/><ref name="illinois"/> | |||
| * '''Duration:''' for most goods, the longer a price change holds, the higher the elasticity is likely to be, as more and more consumers find they have the time and inclination to search for substitutes.<ref name="parkin"/><ref name=GoodwinNelsonAckermanWeisskopf/> When fuel prices increase suddenly, for instance, consumers may still fill up their empty tanks in the short run, but when prices remain high over several years, more consumers will reduce their demand for fuel by switching to ]ing or public transportation, investing in vehicles with greater ] or taking other measures.<ref name="illinois"/> This does not hold for ]s such as the cars themselves, however; eventually, it may become necessary for consumers to replace their present cars, so one would expect demand to be less elastic.<ref name="illinois"/> | |||
| * '''Breadth of definition of a good:''' the broader the definition of a good (or service), the lower the elasticity. For example, Company X's fish and chips would tend to have a relatively high elasticity of demand if a significant number of substitutes are available, whereas food in general would have an extremely low elasticity of demand because no substitutes exist.<ref name="Gillespie48">Gillespie, Andrew (2007). p.48.</ref> | |||
| * ''']:''' an attachment to a certain brand—either out of tradition or because of proprietary barriers—can override sensitivity to price changes, resulting in more inelastic demand.<ref name="Gillespie48"/><ref name="png62">Png, Ivan (1999). p.62-3.</ref> | |||
| * '''Who pays:''' where the purchaser does not directly pay for the good they consume, such as with corporate expense accounts, demand is likely to be more inelastic.<ref name="png62"/> | |||
| == Interpreting values of price elasticity coefficients == | |||
| ] | |||
| ] | |||
| Elasticities of demand are interpreted as follows:<ref name="parkin75">Parkin; Powell; Matthews (2002). p.75.</ref> | |||
| {| class="wikitable" | |||
| |- | |||
| ! Value | |||
| ! Descriptive Terms | |||
| |- | |||
| | E<sub>d</sub> = 0 | |||
| | Perfectly inelastic demand | |||
| |- | |||
| | - 1 < E<sub>d</sub> < 0 | |||
| | Inelastic or relatively inelastic demand | |||
| |- | |||
| | E<sub>d</sub> = - 1 | |||
| | Unit elastic, unit elasticity, unitary elasticity, or unitarily elastic demand | |||
| |- | |||
| | - '''∞''' < E<sub>d</sub> < - 1 | |||
| | Elastic or relatively elastic demand | |||
| |- | |||
| | E<sub>d</sub> = - '''∞''' | |||
| | Perfectly elastic demand | |||
| |} | |||
| A decrease in the price of a good normally results in an increase in the quantity demanded by consumers because of the ], and conversely, quantity demanded decreases when price rises. As summarized in the table above, the PED for a good or service is referred to by different descriptive terms depending on whether the elasticity coefficient is greater than, equal to, or less than −1. That is, the demand for a good is called: | |||
| *''relatively inelastic'' when the percentage change in quantity demanded is ''less than'' the percentage change in price (so that E<sub>d</sub> > - 1); | |||
| *''unit elastic, unit elasticity, unitary elasticity'', or ''unitarily elastic'' demand when the percentage change in quantity demanded is ''equal to'' the percentage change in price (so that E<sub>d</sub> = - 1); and | |||
| *''relatively elastic'' when the percentage change in quantity demanded is ''greater than'' the percentage change in price (so that E<sub>d</sub> < - 1).<ref name="parkin75"/> | |||
| As the two accompanying diagrams show, ''perfectly elastic'' demand is represented graphically as a horizontal line, and ''perfectly inelastic'' demand as a vertical line. These are the ''only'' cases in which the PED and the slope of the demand curve (''∆P/∆Q'') are ''both'' constant, as well as the ''only'' cases in which the PED is determined solely by the slope of the demand curve (or more precisely, by the ''inverse'' of that slope).<ref name="parkin75"/> | |||
| == Effect on total revenue == | |||
| {{See also|Total revenue test}} | |||
| ] | |||
| A firm considering a price change must know what effect the change in price will have on total revenue. Generally any change in price will have two effects:<ref>Krugman, Wells (2009). p.151.</ref> | |||
| * the ''price effect'' : an increase in unit price will tend to increase revenue, while a decrease in price will tend to decrease revenue. | |||
| * the ''quantity effect'' : an increase in unit price will tend to lead to fewer units sold, while a decrease in unit price will tend to lead to more units sold. | |||
| Because of the inverse nature of the relationship between price and quantity demanded (i.e., the law of demand), the two effects affect total revenue in opposite directions. But in determining whether to increase or decrease prices, a firm needs to know what the net effect will be. Elasticity provides the answer: The percentage change in total revenue is equal to the percentage change in quantity demanded plus the percentage change in price. (One change will be positive, the other negative.)<ref>Goodwin, Nelson, Ackerman & Weisskopf (2009). p.122.</ref> | |||
| As a result, the relationship between PED and total revenue can be described for any good:<ref>Gillespie, Andrew (2002). p.51.</ref><ref name="Arnold2008">Arnold, Roger (2008). p. 385.</ref> | |||
| * When the price elasticity of demand for a ] is ''perfectly inelastic'' (E<sub>d</sub> = 0), changes in the price do not affect the quantity demanded for the good; raising prices will cause total revenue to increase. | |||
| * When the price elasticity of demand for a good is ''relatively inelastic'' (- 1 < E<sub>d</sub> < 0), the percentage change in quantity demanded is smaller than that in price. Hence, when the price is raised, the total revenue rises, and vice versa. | |||
| * When the price elasticity of demand for a good is ''unit (or unitary) elastic'' (E<sub>d</sub> = -1), the percentage change in quantity is equal to that in price, so a change in price will not affect total revenue. | |||
| * When the price elasticity of demand for a good is ''relatively elastic'' (- '''∞''' < E<sub>d</sub> < - 1), the percentage change in quantity demanded is greater than that in price. Hence, when the price is raised, the total revenue falls, and vice versa. | |||
| * When the price elasticity of demand for a good is ''perfectly elastic'' (E<sub>d</sub> is − ]), any increase in the price, no matter how small, will cause demand for the good to drop to zero. Hence, when the price is raised, the total revenue falls to zero. | |||
| Hence, as the accompanying diagram shows, total revenue is maximised at the combination of price and quantity demanded where the elasticity of demand is unitary.<ref name="Arnold2008"/> | |||
| It is important to realise that price-elasticity of demand is ''not'' necessarily constant over all price ranges. The linear demand curve in the accompanying diagram illustrates that changes in price also change the elasticity: the price elasticity is different at every point on the curve. | |||
| ==Effect on tax incidence== | |||
| ] | |||
| {{Main|tax incidence}} | |||
| PEDs, in combination with ] (PES), can be used to assess where the incidence (or "burden") of a per-unit tax is falling or to predict where it will fall if the tax is imposed. For example, when demand is ''perfectly inelastic'', by definition consumers have no alternative to purchasing the good or service if the price increases, so the quantity demanded would remain constant. Hence, suppliers can increase the price by the full amount of the tax, and the consumer would end up paying the entirety. In the opposite case, when demand is ''perfectly elastic'', by definition consumers have an infinite ability to switch to alternatives if the price increases, so they would stop buying the good or service in question completely—quantity demanded would fall to zero. As a result, firms cannot pass on any part of the tax by raising prices, so they would be forced to pay all of it themselves.<ref name="wall57">Wall, Stuart; Griffiths, Alan (2008). pp.57-58.</ref> | |||
| In practice, demand is likely to be only ''relatively'' elastic or relatively inelastic, that is, somewhere between the extreme cases of perfect elasticity or inelasticity. More generally, then, the ''higher'' the elasticity of demand compared to PES, the heavier the burden on producers; conversely, the more ''inelastic'' the demand compared to PES, the heavier the burden on consumers. The general principle is that the party (i.e., consumers or producers) that has ''fewer'' opportunities to avoid the tax by switching to alternatives will bear the ''greater'' proportion of the tax burden.<ref name="wall57"/> | |||
| ==Selected price elasticities== | |||
| Various research methods are used to calculate price elasticities in real life, including analysis of historic sales data, both public and private, and use of present-day surveys of customers' preferences to build up ] capable of modelling such changes. Alternatively, ] (a ranking of users' preferences which can then be statistically analysed) may be used.<ref>Png, Ivan (1999). pp.79-80.</ref> | |||
| Though PEDs for most demand schedules vary depending on price, they can be modeled assuming constant elasticity.<ref>{{cite web|url=http://wpscms.pearsoncmg.com/aw_perloff_microecon_3/9/2365/605606.cw/index.html|title=Constant Elasticity Demand and Supply Curves (Q=A*P^c)|accessdate=26 April 2010}}</ref> Using this method, the PEDs for various goods – intended to act as examples of the theory described above - are as follows. For suggestions on why these goods and services may have the PED shown, see the above section on determinants of price elasticity. | |||
| {{col-begin}} | |||
| {{col-break}} | |||
| * Cigarettes (US)<ref name="ReferenceB">Perloff, J. (2008). p.97.</ref> | |||
| ** -0.3 to -0.6 (General) | |||
| ** -0.6 to -0.7 (Youth) | |||
| * Alcoholic beverages (US)<ref>Chaloupka, Frank J.; Grossman, Michael; Saffer, Henry (2002); Hogarty and Elzinga (1972) cited by Douglas Greer in Duetsch (1993).</ref> | |||
| **-0.3 or -0.7 to -0.9 as of 1972 (Beer) | |||
| **-1.0 (Wine) | |||
| **-1.5 (Spirits) | |||
| * Airline travel (US)<ref name=PindyckRubinfeldPage381>Pindyck; Rubinfeld (2001). p.381.; Steven Morrison in Duetsch (1993), p. 231.</ref> | |||
| **-0.3 (First Class) | |||
| **-0.9 (Discount) | |||
| **-1.5 (for Pleasure Travelers) | |||
| * Livestock | |||
| ** -0.5 to -0.6 (])<ref>Richard T. Rogers in Duetsch (1993), p.6.</ref> | |||
| * Oil (World) | |||
| **-0.4 | |||
| * Car fuel<ref>{{cite web|url=http://economics.about.com/od/priceelasticityofdemand/a/gasoline_elast.htm|title=What's the Price Elasticity of Demand for Gasoline?|publisher=About.com|first=Mike|last=Moffatt|accessdate=25 April 2010}}</ref> | |||
| **-0.25 (Short run) | |||
| **-0.64 (Long run) | |||
| * Medicine (US) | |||
| **-0.31 (Medical insurance)<ref name="Samuelson 2001">Samuelson; Nordhaus (2001).</ref> | |||
| **-.03 to -.06 (] Visits) <ref>Goldman and Grossman (1978) cited in Feldstein (1999), p.99</ref> | |||
| {{col-break}} | |||
| * Rice<ref name="Perloff, Microeconomics Theory 2008">Perloff, J. (2008).</ref> | |||
| **-0.47 (Austria) | |||
| **-0.8{{0}} (Bangladesh) | |||
| **-0.8{{0}} (China) | |||
| **-0.25 (Japan) | |||
| **-0.55 (US) | |||
| * Cinema visits (US) | |||
| **-0.87 (General)<ref name="Samuelson 2001"/> | |||
| * Live Performing Arts (Theater, etc.) | |||
| ** -0.4 to -0.9 <ref>Heilbrun and Gray (1993, p.94) cited in Vogel (2001)</ref> | |||
| * Transport | |||
| ** -0.20 (Bus travel US)<ref name="Samuelson 2001"/> | |||
| ** -2.8{{0}} (Ford compact automobile)<ref>Goodwin; Nelson; Ackerman; Weissskopf (2009). p.124.</ref> | |||
| * Soft drinks | |||
| **-0.8 to -1.0 (general)<ref>Brownell, Kelly D.; Farley, Thomas; Willett, Walter C. et al. (2009).</ref> | |||
| **-3.8 (])<ref name="ayers120">Ayers; Collinge (2003). p.120.</ref> | |||
| **-4.4 (])<ref name="ayers120"/> | |||
| * Steel | |||
| **-0.2 to -0.3<ref>Barnett and Crandall in Duetsch (1993), p.147</ref> | |||
| *Eggs | |||
| **-0.1 (US: Household only),<ref>Krugman and Wells (2009) p.147.</ref> -0.35 (Canada),<ref>{{cite web|url=http://www.agr.gc.ca/poultry/prinde3_eng.htm#sec312|title=Profile of The Canadian Egg Industry|publisher=Agriculture and Agri-Food Canada|accessdate=9 September 2010}}</ref> -0.55 (South Africa)<ref>{{cite web|url=http://www.informaworld.com/smpp/content~db=all~content=a922602410|title=Demand Analysis of Eggs in South Africa|publisher=Routledge|first=RCG|last=Cleasby|accessdate=9 September 2010}}</ref> | |||
| {{col-end}} | |||
| ==See also== | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| ==Notes== | |||
| {{Reflist|2}} | |||
| ==References== | |||
| {{refbegin}} | |||
| * {{cite book|last=Arnold|first=Roger A.|title=Economics|url=http://books.google.com/books?id=EGeEMRfsrRsC|accessdate=28 February 2010|date=17 December 2008|publisher=Cengage Learning|isbn=9780324595420}} | |||
| * {{Cite book|last1=Ayers|last2=Collinge|title=Microeconomics|publisher=Pearson|year=2003}} | |||
| * {{Cite journal|url=http://content.nejm.org/cgi/content/full/NEJMhpr0905723|title=The Public Health and Economic Benefits of Taxing Sugar-Sweetened Beverages|first=Kelly D.|last=Brownell|first2=Thomas|last2=Farley|first3=Walter C.|last3=Willett|first4=Barry M.|last4=Popkin|first5=Frank J.|last5=Chaloupka|first6=Joseph W.|last6=Thompson|first7=David S.|last7=Ludwig|journal=New England Journal of Medicine|volume=361|pages=1599–1605|date=15 October 2009}} | |||
| * {{Cite book|last1=Case|first1=Karl|last2=Fair|first2=Ray|year=1999|title=Principles of Economics|edition=5th|publisher=Prentice-Hall|isbn=0-13-961905-4}} | |||
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| * {{cite book|last=Duetsch|first=Larry L.|title=Industry Studies|publisher=Prentice Hall|location=Englewood Cliffs, NJ|year=1993}} | |||
| * {{cite book|last=Feldstein|first=Paul J.|title=Health Care Economics|edition=5th|publisher=Delmar Publishers|location=Albany, NY|year=1999|isbn=0766806995}} | |||
| * {{cite book|last=Ferguson|first=Charles E.|title=Microeconomic Theory|publisher=Richard D. Irwin|location=Homewood, Illinois|year=1972|edition=3rd}} | |||
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| {{refend}} | |||
| ==External links== | |||
| * | |||
| *{{dead link|date=October 2010}} | |||
| {{good article}} | |||
| {{DEFAULTSORT:Price Elasticity Of Demand}} | |||
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Revision as of 13:27, 11 October 2010
Not to be confused with Price elasticity of supply.
DICK HEAD
conform to the law of demand, such as Veblen and Giffen goods, have a positive PED. In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded. The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one (in absolute value): that is, changes in price have a relatively large effect on the quantity of a good demanded.
Revenue is maximised when price is set so that the PED is exactly one. The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good. Various research methods are used to determine price elasticity, including test markets, analysis of historical sales data and [[Conjoint analysis (in marketing)|conjoint an