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  • Determinants of PED

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    Wong Yu Han Amelia (Yijc)
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    The three main determinants of price elasticity of demand (PED) are: 1) The higher the proportion of income spent on a good, the higher the PED, as consumers have increased opportunity costs associated with spending; 2) The larger the number and closeness of substitutes for a good, the higher the PED; 3) Necessity goods like staples have a lower PED, while the PED increases over a longer time period as consumers can substitute goods.

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    The three main determinants of price elasticity of demand (PED) are: 1) The higher the proportion of income spent on a good, the higher the PED, as consumers have increased opportunity costs associated with spending; 2) The larger the number and closeness of substitutes for a good, the higher the PED; 3) Necessity goods like staples have a lower PED, while the PED increases over a longer time period as consumers can substitute goods.

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    15 views4 pages

    Determinants of PED

    Uploaded by

    Wong Yu Han Amelia (Yijc)
    The three main determinants of price elasticity of demand (PED) are: 1) The higher the proportion of income spent on a good, the higher the PED, as consumers have increased opportunity costs associated with spending; 2) The larger the number and closeness of substitutes for a good, the higher the PED; 3) Necessity goods like staples have a lower PED, while the PED increases over a longer time period as consumers can substitute goods.

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    of 4

    Determinants of PED

    Proportion of income spent on


    good - the higher the
    proportion of income spent on
    good, the higher the PED.

    Why? —> The higher the


    proportion of income spent, it
    means that consumers would
    have increased opportunity
    cost associated with that
    spending. Hence, they would
    be more price sensitive since
    they will be foregoing more of
    other goods if they commit to
    the buying the good.
    Availability of Substitutes
    (number and closeness)

    The larger the number and


    closeness of substitutes, the
    higher the PED.

    Why?
    Coffee and Tea Vs Pepsi and
    Coke
    Number of substitutes
    depends on the broadness of
    definition.

    Food Vs Rice
    N - Necessity Factor

    –
    Staples or Addiction

    The higher the necessity


    factor, the lower the PED.

    T - Time Period

    The longer the time period


    under consideration, the
    higher the PED. Why?

    Petrol prices are rising —>


    PED < 1 (SR)

    Switch to electric car or hybrid


    car or more fuel efficient cars.
    The PED will increase.

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