Then when demand increases to D 1D 1, PED falls to -2.5 (25%/-10%). 4, PED is initially -5 (50%/ -10%) when price falls from $10 to $9. So a shift in the demand curve to the right reduces PED at any given price. The more consumers want and are able to buy a product, the less sensitive they are to price changes. PED also changes when there is a shift in the demand curve. At the mid-point there is unit PED, with the percentage change in quantity demanded matching the percentage change in price. 3 shows how PED varies over a straight line demand curve. At this point, demand is perfectly inelastic. If price falls to zero, there will be a limit to the amount people want to consume. a 10% fall in price when the price was initially $1 is not very significant and is unlikely to result in much extra demand.
At this point, demand would be perfectly elastic.Īs the price falls, demand becomes more inelastic. If a supplier was foolish enough to keep raising the price, a point would come when the product would be priced out of the market. This is because, for instance, a 10% rise in price when price was initially $10,000 would involve consumers having to spend considerably more (i.e. Consumers become more sensitive to price changes, the higher the price of the product. PED becomes more elastic as the price of a product rises.
The first step to measure YED is to categorize the goods as normal and inferior. If the YED for a particular product is high, it becomes more responsive to the change in consumer's income. Income elasticity of demand (YED) change in quantity/ change in income. Def: YED measures the change in the quantity demanded of a good caused by the change in the income of consumers. A figure of – 2, for instance, indicates that a 1% change in price will cause a 2% change in quantity demanded. Mathematically, it is expressed by the income elasticity of demand formula. This indicates the extent by which demand will extend or contract when price changes. The other piece of information is provided by the size of the figure. This tells us that there is an inverse relationship between demand and price – a rise in price will cause a contraction in demand and a fall in price will cause an extension in demand. In the vast majority of cases, it is a minus. The PED figure provides two pieces of information.
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