The Determinants of PED

• Some products are more responsive to changes in prices than other products

  
  

• The factors that determine the responsiveness are called the determinants of PED & include:

  • Availability of substitutes: good availability of substitutes results in a higher value of PED (relatively elastic)

  • Addictiveness of the product: addictiveness turns products into necessities resulting in a low value of PED (relatively inelastic)

  • Price of product as a proportion of income: the lower the proportion of income the price represents, the lower the PED value will be. Consumers are less responsive to price changes on cheap products (relatively inelastic)

  • Time period: In the short term, consumers are less responsive to price increases resulting in a low value of PED (relatively inelastic). Over a longer time period consumers may feel the price increase more and will then look for substitutes resulting in a higher value of PED (relatively elastic)

PED & Total Revenue

• Revenue is the amount of money a firm receives from selling its goods/services

  • Total revenue = price x quantity

• The total revenue rule states that in order to maximise revenue, firms should increase the price of products that are inelastic in demand & decrease prices on products that are elastic in demand 

• This can be illustrated using a demand curve