Some products are more responsive to changes in prices than other products
The factors that determine responsiveness are called the determinants of PED and include:
S - Availability of substitutes
Good availability of substitutes results in a higher value of PED (relatively elastic).
P - 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).
L - Luxury or necessity
Luxury goods are more elastic because they are not essential, while necessities are more inelastic because consumers have no choice but to buy them.
A - Addictiveness of the product
Addictiveness turns products into necessities, resulting in a low value of PED (relatively inelastic).
T - 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 period of time, consumers may feel the price increase more and will then look for substitutes, resulting in a higher value of PED (relatively elastic).
What role does the necessity of a good play in determining its price elasticity of demand?
How does the proportion of income spent on a good influence its price elasticity of demand?
What is the impact of time on the price elasticity of demand for a product?
How do consumer preferences and habits affect the price elasticity of demand?
What is the difference between elastic, inelastic, and unitary elastic demand?
How can businesses use knowledge of PED to make pricing decisions?