Price Elasticity of Demand (PED)

Factors affecting PED (price elasticity of demand)

• Few substitutes — if consumers cannot easily switch to another product, demand is more price inelastic (PED closer to 0). A price rise causes only a small fall in quantity demanded.
• Low competition — with few rival firms or brands, consumers have less choice, so demand tends to be more inelastic.
• Habitual / addictive goods — cigarettes, coffee or daily routines make consumers less responsive to price changes → lower PED (more inelastic).
• Price sensitivity — if buyers are highly aware of and react to price changes, demand is more elastic (higher |PED|). Luxury or easily postponed purchases are often more price sensitive.
• Proportion of income — goods that take up a large share of a consumer's budget (e.g. rent, cars) tend to have more elastic demand, because a price change has a bigger impact on real spending power.