Download Price Elasticities of Demand (PED) Inferior Goods

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Transcript
Price Elasticities of Demand (PED)
Price elasticity of demand measures how much the quantity demanded changes in relation to a change in price.
This is important for entrepreneurs as they want to know:
- the impact a change in price would have on their revenue & ultimately profit.
- how sucessfull puttng products on sale is likely to be.
- whether they should absorb cost increases themselves or pass them onto the consumer through higher prices
To calculate it:
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PED= Price
% change in quantity demanded
% change in price
Elastic demand
P
P1
Elastic
demand
This is when a change in price results in a larger % change in
the quantity demanded.
D
Q
Q1
If substitutes exist then a product is likely to have elastic demand (coca cola & pepsi).
Luxury goods also tend to have elastic demand (since they are
not essential).
Quantity
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Price
Inelastic Demand
This is when a change in price results in smaller % change
in the quantity demanded of a product.
P
Low value goods such as sugar & salt are likely to be
inelastic.
P1
Goods that are necessary such as shampoo & soap tend to
be inelastic since people have to purchase them.
Inelastic
demand
Q
Q1
D
Quantity
Price inelastic
Price elastic
* luxury good
* very cheap
* neccesity for food
* no substitutes
* lots of substitute goods
* lots of competitors
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Inferior Goods
* These are products that people actually buy less of as they have more disposable income.
* In this example, as comsumers have more money, they are likely to buy less cheap disposable razors and buy a more
expensive, high quality version instead.