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Price elasticity of demand (PED)

Price elasticity of demand (PED)
-        Price elasticity of demand (PED): how much the quantity demanded of a good changes when its price changes. The responsiveness of the quantity demanded of a good to changes in its price.
Formula: %DQD/%DP
PED is always negative, because there is an inverse relationship between price and quantity demanded.
When PED = 0, the demand for the good is perfectly inelastic. Here changes in price have no effect on the quantity demanded.
When PED is between 0 and -1, demand is inelastic. Here demand is not very responsive to changes in price. A change in price leads to a smaller change in quantity demanded.
When PED < -1, demand is elastic. Here demand is very responsive to changes in price. A change in price leads to a larger change in quantity demanded.
Demand would be perfectly elastic if the PED were -∞. In this (hypothetical) case, any change in price would result in demand falling to 0. So people would be only willing to buy the good at one price.
Unit elastic is when the PED = -1. Here demand changes proportionally to price.

Factors that make demand inelastic:

1.     Few (close) substitutes. (e.g. Harry Potter books)
This can be as a result of brand loyalty (e.g. above/music artists), or addiction (e.g fags)
2.     There are many complementary goods or many uses for that good.
3.     The good is broadly defined (e.g. food is going to be more inelastic than bread)
4.     The price of the good makes up a small proportion of the consumer’s income. (e.g. Crème Egg)
This is because larger increases in price in a cheaper good are less money, so people would still be willing to buy them.
5.     The time period under consideration is short.

(e.g. the day after a change in transport fares, the quantity of people taking the transport won’t have changed much, whereas a year after it may have.)
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