Understanding price elasticity of demand (PED) is really important when we want to know how people decide what to buy.
So, what is PED? It simply tells us how much the amount people want to buy changes when the price changes.
Here’s a simple formula to remember:
This means we look at the percentage change in how much people buy compared to the percentage change in price.
When the demand is elastic (PED > 1), people respond a lot to price changes.
For instance, if ice cream prices go down, many more people will buy it because ice cream is a fun treat and there are other options available.
But if the price of something necessary, like medicine, goes up, people won’t buy a lot less. This is an example of inelastic demand (PED < 1) because they need it regardless of the price.
Several things can change how elastic or inelastic demand is:
Availability of Substitutes: The more alternatives there are, the more elastic the demand. If coffee prices rise, many people might just switch to tea instead.
Necessity vs. Luxury: Things we need all the time (necessities) usually have inelastic demand. People will still buy them even if the price goes up. On the other hand, luxuries have elastic demand since people can skip buying them if they want.
Part of Income: If something takes up a big part of a person's income, it becomes more elastic. For example, if rent goes up a lot, many might have to move to a cheaper place.
Let’s look at some real-life situations. If a popular smartphone gets way more expensive, people might choose a cheaper one or decide to wait to buy a new phone.
On the other hand, if a new video game goes on sale, many more people may buy it because it’s a fun thing that they can choose not to buy if money is tight.
In short, price elasticity of demand is super important when it comes to understanding how people make their purchase decisions. It impacts everything from daily shopping trips to big buys!
Understanding price elasticity of demand (PED) is really important when we want to know how people decide what to buy.
So, what is PED? It simply tells us how much the amount people want to buy changes when the price changes.
Here’s a simple formula to remember:
This means we look at the percentage change in how much people buy compared to the percentage change in price.
When the demand is elastic (PED > 1), people respond a lot to price changes.
For instance, if ice cream prices go down, many more people will buy it because ice cream is a fun treat and there are other options available.
But if the price of something necessary, like medicine, goes up, people won’t buy a lot less. This is an example of inelastic demand (PED < 1) because they need it regardless of the price.
Several things can change how elastic or inelastic demand is:
Availability of Substitutes: The more alternatives there are, the more elastic the demand. If coffee prices rise, many people might just switch to tea instead.
Necessity vs. Luxury: Things we need all the time (necessities) usually have inelastic demand. People will still buy them even if the price goes up. On the other hand, luxuries have elastic demand since people can skip buying them if they want.
Part of Income: If something takes up a big part of a person's income, it becomes more elastic. For example, if rent goes up a lot, many might have to move to a cheaper place.
Let’s look at some real-life situations. If a popular smartphone gets way more expensive, people might choose a cheaper one or decide to wait to buy a new phone.
On the other hand, if a new video game goes on sale, many more people may buy it because it’s a fun thing that they can choose not to buy if money is tight.
In short, price elasticity of demand is super important when it comes to understanding how people make their purchase decisions. It impacts everything from daily shopping trips to big buys!