![]() ![]() When demand decreases, consumers become more sensitive to price changes and demand becomes more elastic. 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. A figure of – 2, for instance, indicates that a 1% change in price will cause a 2% change in quantity demanded. 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. A normal good is one where demand is directly proportional to income. A YED larger than 1 tends to be the case for luxury goods - as average income increases, consumers tend to spend more on luxuries like designer clothes, expensive jewellery, or luxury holidays. The PED figure provides two pieces of information. YED can be calculated using the following equation: change in quantity demanded change in income Normal goods When the equation gives a positive result, the good is a normal good. YED> 1: If YED is much higher than one, it implies income elastic demand.This means that a change in income will result in a proportionally larger change in quantity demanded. ![]()
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