1.2.2

Factors Affecting Price Elasticity of Demand

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Perfectly Elastic Demand vs Perfectly Inelastic Demand

The effect of things like government intervention and changes in income may have different impacts on a market if demand is perfectly elastic or perfectly inelastic.

Perfectly elastic demand

Perfectly elastic demand

  • Perfectly elastic demand - PED = +/- infinity.
    • Any price increase will cause demand to drop to zero.
Perfectly inelastic demand

Perfectly inelastic demand

  • Perfectly inelastic demand - PED = zero.
    • Any price change won't affect demand.
'I' for inelastic!

'I' for inelastic!

  • A perfectly inelastic demand curve would look vertical on a diagram as the quantity demanded would be the same regardless of the price.
  • An easy way to remember this is that the more inelastic demand is, the more the demand curve looks like an 'i' for 'inelastic'.

What Affects the Elasticity of Demand?

There are a number of factors that affect the elasticity of demand.

Availability of substitute goods/services

Availability of substitute goods/services

  • The more substitutes there are available, the more price elastic a good is.
  • This is because it is easy to find an alternative product as a replacement if the price of one good rises.
    • E.g. washing detergents are fairly price elastic. If the price of one goes up, you can easily swap it for an alternative.
Percentage of income and time

Percentage of income and time

  • The higher the proportion of income spent, the more elastic the good or service is. People are more sensitive to the price of a TV vs a Mars bar.
  • Goods tend to be more price elastic in the long run because time can be devoted to searching for appropriate alternatives.
Type of good

Type of good

  • The nature of the good can influence how elastic the demand is.
  • Addictive goods tend to be more price inelastic because a change in price is unlikely to affect quantity significantly (if users feel they have a need for the product).
    • E.g. cigarettes.
  • But items that are not absolutely essential are more elastic.
    • E.g. kitchen roll.

Impact of indirect taxes

  • The impact of an indirect tax depends on the PED of the good or service.
  • Picture a tax as effectively shifting supply to the left. This leads to a fall in demand.
  • However, if the good has inelastic demand, the reduction in consumption will be small. The consumer burden is significantly higher than the producer burden.
  • The reverse is true for an indirect tax on a good or service with elastic demand.
  • Therefore PED is central to the impact of an indirect tax.
Impact of subsidies

Impact of subsidies

  • The impact of a subsidy depends on the PED of the good or service.
  • Effectively, a subsidy shifts the supply curve to the right. This means demand should increase.
  • If the good or service has an inelastic demand, the price will drop more than the quantity increases.
  • If the good or service has an elastic demand, the price will drop less than the quantity increases.
  • Therefore PED is central to the impact of a subsidy.
Jump to other topics
1

Microeconomics

1.1

Competitive Markets: Demand & Suply

1.1.1Markets & Demand1.1.2Diminishing Marginal Returns1.1.3Supply1.1.4Market Equilibrium1.1.5Price Mechanism1.1.6Consumer & Producer Surplus1.1.7IB Multiple Choice - Demand1.1.8IB Multiple Choice - Supply
1.2

Elasticity

1.2.1Elasticities of Demand1.2.2Factors Affecting Price Elasticity of Demand1.2.3Elasticity of Supply1.2.4Price Elasticity of Supply1.2.5IB Multiple Choice - Price Elasticity of Demand1.2.6IB Multiple Choice - Price Elasticity of Supply1.2.7IB Multiple Choice - Other Elasticities
1.3

Government Intervention

1.3.1Indirect Taxes & Subsidies1.3.2Application Question - Taxing Prices or Quantities1.3.3Subsidies & Price Controls1.3.4Deadweight Loss & Government Intervention1.3.5Elasticity & Tax Incidence1.3.6IB Multiple Choice - Government Intervention
1.4

Market Failure

1.4.1Types of Market Failure1.4.2Introduction to Externalities1.4.3Negative Externalities1.4.4Policy for Negative Externalities1.4.5Positive Externalities1.4.6The Deadweight Welfare Loss of Externalities1.4.7Case Study - The Externalities of Education1.4.8Public Goods & the Free-Rider Problem1.4.9Asymmetric Information1.4.10End of Topic Test - Market Failure1.4.11Application Questions - Market Failure
1.5

HL: Theory of the Firm & Market Structures

1.5.1Theory of the Firm & Market Structures
2

Macroeconomics

2.1

The Level of Overall Economic Activity

2.1.1The Circular Flow of Income2.1.2Defining GDP2.1.3Limitations of GDP2.1.4IB Multiple Choice - Economic Indicators2.1.5Business Cycles2.1.6Output Gaps
2.2

Aggregate Demand & Aggregate Supply

2.2.1The Aggregate Demand Curve2.2.2Components of Aggregate Demand2.2.3Shape of the Aggregate Demand Curve2.2.4Shifts in Aggregate Demand2.2.5IB Multiple Choice - Aggregate Demand2.2.6Short & Long-Run Aggregate Supply2.2.7Alternative Models of LRAS2.2.8Equilibrium in the AD-AS Model2.2.9Output Gaps & the AD-AS Model
2.3

Macroeconomic Objectives

2.3.1Introduction to Unemployment2.3.2Limitations of Unemployment2.3.3Types of Unemployment2.3.4Causes & Impact of Unemployment2.3.5Defining Inflation2.3.6Measuring Inflation2.3.7Use of Index Numbers2.3.8The Consumer Price Index2.3.9Consequences of Inflation2.3.10Causes of Inflation2.3.11Inflation & Unemployment Tradeoff2.3.12The Short-Run Phillips Curve2.3.13The Long-Run Phillips Curve
2.4

Economic Growth, Poverty & Inequality

2.4.1Measuring Economic Growth2.4.2Determinants of Productivity2.4.3Economic Growth & Productivity2.4.4Absolute & Relative Poverty2.4.5Inequality2.4.6Inequality 22.4.7Lorenz Curve2.4.8Government Policy on Poverty2.4.9End of Topic Test - Poverty & Inequality2.4.10Application - Inequality & Poverty
2.5

Fiscal Policy

2.5.1Introduction to Fiscal Policy2.5.2Fiscal Policy and AD-AS Model2.5.3Fiscal Policy Lags2.5.4Automatic Stabilizers2.5.5IB Multiple Choice - Fiscal Policy
2.6

Monetary Policy

2.6.1Objectives of Monetary Policy2.6.2Monetary Policy Implementation2.6.3Monetary Policy & AD-AS Model2.6.4Monetary Policy Lags & Pitfalls
2.7

Supply-Side Policies

2.7.1Supply-Side Policies2.7.2Supply-Side Policies 2
3

The Global Economy

3.1

International Trade

3.1.1Globalisation3.1.2Globalisation for LEDCs3.1.3Globalisation for MEDCs3.1.4Comparative Advantage & Trade3.1.5Protectionism3.1.6Arguments for Protectionism3.1.7Arguments Against Protectionism3.1.8End of Topic Test - Globalisation & Trade3.1.9Case Study - Globalisation & Trade
3.2

Exchange Rates

3.2.1Floating Exchange Rates3.2.2Fixed Exchange Rate3.2.3Effect of a Stronger & Weaker Dollar
3.3

The Balance of Payments

3.3.1Balance of Payments3.3.2Balance of Payments 23.3.3FDI & Reducing a BoP Deficit
3.4

Economic Integration

3.4.1Customs Unions & WTO3.4.2Merged Currency
3.5

Terms of Trade

3.5.1Absolute & Comparative Advantage3.5.2Gains from Trade3.5.3Terms of Trade3.5.4IB Multiple Choice - Comparative Advantage & Trade
3.6

Economic Development

3.6.1Factors Influencing Growth & Development3.6.2International Institutions3.6.3Measures of Development3.6.4Barriers to Development3.6.5Case Study - The Bottom Billion3.6.6End of Topic Test - Emerging & Developing
3.7

The Role of Domestic & International Factors

3.7.1Interventionist Strategies3.7.2Development Strategies3.7.3Development Promotion Policies3.7.4End of Topic Test - Growth & Global Development3.7.5Application Questions -Growth & Global Development
3.8

The Role of International Trade

3.8.1International Institutions3.8.2End of Topic Test - Globalisation & Trade
3.9

The Role of Foreign Aid

3.9.1Aid3.9.2Limitations of Aid3.9.3Support for Aid3.9.4Application Questions - Developing Countries

Practice questions on Factors Affecting Price Elasticity of Demand

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    What would the elasticity of demand of a perfectly inelastic good be?Multiple choice
  2. 2
    Perfectly elastic demand is more likely if competition between firms in a market is what?Multiple choice
  3. 3
    What does this demand curve show?Multiple choice
  4. 4
    Factors that affect elasticity of demand:Fill in the list
  5. 5
    For the majority of households, how could you describe the elasticity of demand for a car?Multiple choice
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Elasticities of Demand

Elasticity of Supply