2.5.5—Determinants and importance of PED

Determinants of PED explain why buyers respond differently.

Substitutes, necessity, habit, budget share and time affect how easily consumers can change quantity demanded after a price change.

Example

A branded medicine may have inelastic short-run demand but become more elastic when substitutes or time to adjust increase.

Name the determinant and the direction of its effect before assigning an elasticity.

These are tendencies, not universal values; market segment and time horizon matter.

Four syllabus determinants: more and closer substitutes make demand more elastic; greater necessity makes it more inelastic; a larger proportion of income makes it more elastic; and more adjustment time usually makes it more elastic. Firms use PED for pricing and revenue forecasts, while governments use it to anticipate tax effects on consumption and revenue. Apply tendencies to a defined market and time period.