Determinants of PED

Lesson 2

Learning outcomes
Explain the PED is reflected in the slope of
the Demand curve
Explain the determinants of PED -S.P.L.A.T.
PED varies along the demand curve

Elastic Demand Graph

% change in Price
is <
% change in Quantity
Demanded
Can you calculate the PED
with a decrease in price?
http://img.sparknotes.com/figures/5/5259b727009a2736d6ad639bab3494ff/elastic.
gif

Inelastic Demand Graph

% change in Price
is >
% change in Quantity Demanded
Can you calculate the PED for
an increase in Price?
http://img.sparknotes.
com/figures/5/5259b727009a2736d6ad639bab3494ff/inelas.gif

Determinants of PED
S.P.L.A.T.
S - Substitutes (number of)
P - Proportion of Income
L - Luxury vs. Necessity
A - Addictive or not?
T - Time to respond

Substitutes
Number of Substitutes:
Large number of substitutes - Consumers
will be more sensitive to price changes.
Elastic Demand or Price Elastic
Small number of substitutes - Consumers
will be less sensitive to price changes.
Inelastic Demand or Price Inelastic

Proportion of Income
Large Proportion of Income - Consumers are
more sensitive to price changes of goods that
consume large portions of their income. Elastic
Demand or Price Elastic
Small Proportion of Income - Consumers are
less sensitive to price changes of goods that do
not consume large portions of their income.
Inelastic Demand or Price Inelastic

Luxury or Necessity
Luxury - Consumers are more sensitive to
price changes of luxury goods. Ex. Yacht.
Price elastic or elastic demand.
Necessity - Consumers are less sensitive to
price changes of necessities. Ex. Water. Price
inelastic of inelastic demand.

Addictive or not.
Degree of addictiveness - the more addictive
the good the more inelastic the demand (price
inelastic).
Which would have the highest PED?
Coffee, salty foods, Heroine

Time to respond...
Short time - consumers are less likely to
respond to price changes immediately after a
price change. Price Inelastic or Inelastic
Demand
Long time - consumers are more likely to
respond to price changes the longer they
have...consumers can find other substitute.
Price elastic or Elastic Demand