Substitution - :
This is the key determinant of the PED for a good or service. In general, the greater the number and availability of close substitutes there are for a good or service, the higher the value of its PED will tend to be. This is because such products are easily replaced if the price increases
Due to the large number of close substitutes that are readily available. By contrast, products with few substitutes, such as toothpicks, private education and prescribed medicines, have relatively price inelastic demand.
Income - :
The proportion of a consumer’s income that is spent on a product also affects the value of its PED. If the price of a box of toothpicks or a packet of salt were to double, the percentage change in price would be so insignificant to the consumer’s overall income that quantity demanded would be hardly affected, if at all.
By contrast, if the price of an overseas cruise holiday were to rise by 25% from $10,000 to $12,500 per person, this would discourage many customers because the extra $2,500 per ticket has a larger impact on a person’s disposable income (even though the percentage increase in the price of a cruise holiday is much lower than that of a box of toothpicks or a packet of salt). Therefore, the larger the proportion of income that the price of a product represents
Necessity - :
The degree of necessity of a good or service will affect the value of its PED. Products that are regarded as essential (such as food, fuel, medicines, housing and transportation) tend to be relatively price inelastic because households need these goods and services, and so will continue to purchase them even if their prices rise. Cause its a need for them.
By contrast, the demand for luxury products (such as Gucci suits, Chanel handbags and Omega watches) is price elastic as these are not necessities for most households. The degree of necessity also depends on the timeframe in question. For example, demand for fresh flowers on Valentine’s Day and on Mothers’ Day is relatively price inelastic compared to other days.
The relationship between price elasticity of demand and total revenue
Knowledge of the price elasticity of demand for a product can be used to assess the impact on consumer expenditure and therefore sales revenues following changes in price.
Sales revenue is the amount of money received by a supplier from the sale of a good or service.
It is calculated by multiplying the price charged for each product by the quantity sold:
Sales revenue = price × quantity demanded
For example, if a retailer sells 5000 laptops at $700 each, then its sales revenue is $3.5 million. 700 times 5000 = 3.5 million
Here the demand curve is relatively price inelastic (rather unresponsive to changes in price). If the firm raises its price
The percentage increase in price is far greater than the subsequent fall in demand. Hence, sales revenue will increase (and vice versa)
Here the demand curve is relatively price elastic (somewhat responsive to changes in price). A cut in price will therefore lead to a net gain in sales revenue.
By contrast, if price were to increase customers would simply switch to substitutes, thereby generating a net loss in sales revenue