Price elasticity of demand measures the responsiveness of demand to a change in price. see: Price elasticity of demand
- Price inelastic – a change in price causes a smaller % change in demand.
- Price elastic – a change in price causes a bigger % change in demand.
Examples of price inelastic demand
We say a good is price inelastic, when an increase in price causes a smaller % fall in demand, e.g. if price of petrol falls 30%, but demand for petrol only increases 10% the PED = - 0.33
- Petrol – petrol has few alternatives because people with a car, need to buy petrol. For many driving is a necessity. There are weak substitutes, such as train, walking and the bus. But, generally, if the price of petrol goes up, demand proves very inelastic.
- Salt. If the price of salt increased, demand would largely be unchanged. It is only a small % of income and people tend to buy infrequently. It is a good with no real substitutes at all. Continue Reading →