Question

Describe the types of price elasticity of demand and describe the factors affecting elasticity of demand.

Hint:

Price elasticity measures the responsiveness of demand to price changes. Factors such as availability of substitutes and the nature of the good affect elasticity.

Answer 1

Price elasticity of demand (PED) refers to how sensitive the quantity demanded is to a change in price. The types of PED are: \[\begin{array}{rl} \bullet & \text{Perfectly Elastic Demand: When a small change in price causes an infinite change in quantity demanded. (Horizontal demand curve)} \\ \bullet & \text{Elastic Demand: When the percentage change in quantity demanded is greater than the percentage change in price.} \\ \bullet & \text{Unitary Elastic Demand: When the percentage change in quantity demanded is equal to the percentage change in price.} \\ \bullet & \text{Inelastic Demand: When the percentage change in quantity demanded is less than the percentage change in price.} \\ \bullet & \text{Perfectly Inelastic Demand: When quantity demanded does not change with any change in price. (Vertical demand curve)} \\ \end{array}\] Factors Affecting Elasticity of Demand: \[\begin{array}{rl} \bullet & \text{Availability of Substitutes: More substitutes make demand more elastic.} \\ \bullet & \text{Necessity vs Luxury: Necessities tend to have inelastic demand, while luxuries have elastic demand.} \\ \bullet & \text{Time Period: Demand is more elastic in the long run than in the short run.} \\ \bullet & \text{Proportion of Income: The higher the price relative to income, the more elastic the demand.} \\ \end{array}\]