Y1 10) Price Elasticity of Demand - PED

Summary

This video explains the basic law of demand, highlighting how price changes affect quantity demanded. It introduces the concept of price elasticity of demand (PED), demonstrating how to calculate it and interpret its values. Key examples illustrate inelastic and elastic demand through products like cigarettes and sofas. The video also outlines factors influencing elasticity using the acronym SPLAT, covering substitutes, income percentage, luxury vs. necessity, addictiveness, and time period. Overall, it emphasizes the importance of understanding PED for effective business pricing strategies.

Takeaways

• 😀 The basic law of demand states that as the price increases, the quantity demanded decreases, and vice versa.
• 📊 Price elasticity of demand (PED) measures how responsive quantity demanded is to changes in price.
• 📏 The formula for calculating PED is the percentage change in quantity demanded divided by the percentage change in price.
• 🔄 PED values greater than 1 indicate price elastic demand, meaning quantity demanded changes more than price changes.
• 🔻 PED values less than 1 indicate price inelastic demand, where quantity demanded changes less than price changes.
• 📉 Perfectly inelastic demand (PED = 0) means quantity demanded doesn't change regardless of price changes.
• 💨 Perfectly elastic demand (PED = ∞) means quantity demanded changes infinitely with any price change.
• 🏷️ Demand curves can be steep for inelastic demand and shallow for elastic demand, visually representing responsiveness.
• 🔑 The acronym 'SPLAT' helps remember factors affecting elasticity: Substitutes, Proportion of income, Luxury vs. necessity, Addiction, and Time period.
• 📅 In the short run, demand is typically more inelastic due to fewer substitutes, while in the long run, demand tends to be more elastic as alternatives become available.

Q & A

What is the basic law of demand?

The basic law of demand states that as the price of a good increases, the quantity demanded decreases, and vice versa.

What does price elasticity of demand (PED) measure?

Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price.

How is price elasticity of demand calculated?

PED is calculated using the formula: PED = (Percentage Change in Quantity Demanded) / (Percentage Change in Price).

What does a PED value greater than 1 indicate?

A PED value greater than 1 indicates that demand is price elastic, meaning the quantity demanded changes proportionately more than the price change.

What does a PED value less than 1 signify?

A PED value less than 1 signifies that demand is price inelastic, meaning the quantity demanded changes proportionately less than the price change.

Why is the negative sign in PED calculations often ignored?

The negative sign in PED calculations is often ignored because it is a reflection of the law of demand, and the absolute value provides the necessary information about elasticity.

What is the significance of knowing whether demand is elastic or inelastic for businesses?

Understanding whether demand is elastic or inelastic helps businesses make informed pricing decisions and forecast how changes in price can affect total revenue.

What does the acronym SPLAT stand for regarding factors influencing price elasticity?

SPLAT stands for Substitutes, Proportion of Income, Luxury vs. Necessity, Addictive Goods, and Time, which are all factors that affect the price elasticity of demand.

How do substitutes affect the price elasticity of demand?

The more substitutes available for a good, the more elastic the demand tends to be, as consumers can easily switch to alternatives if the price increases.

What is the difference between perfectly elastic and perfectly inelastic demand?

Perfectly elastic demand is represented by a horizontal line, indicating that any price change will lead to an infinite change in quantity demanded. Perfectly inelastic demand is represented by a vertical line, meaning that quantity demanded remains constant regardless of price changes.