Elasticity of Demand

  • Elasticity is one of the most important concepts in microeconomics.

Elasticity of demand measures the responsiveness/sensitivity of demand to a change in an economic variable. Price elasticity of demand measures the responsiveness of demand to a change in it’s own price.

Firms can make future estimates using PED figures:

  • The effect of a change in price on total revenue and expenditure on a product/service.
  • The effect of a change in indirect tax ( vat, import duty) on the price and quantity demanded and whether a business owner can pass some or all of the tax on to the consumer.
  • Price Discrimination: The practice of selling identical goods or services at different prices from the same provider. The difference in price does not reflect cost differences.
  • For example, where a business owner/organisation decides to charge different prices to different segments of the market, eg., peak and off peak rail travel or the airline industry sell travel tickets simultaneously to different market segments. Airlines use price discrimination by using discounts, coupons, vouchers and frequent flyer air loyalty programs/travel credit cards. The purpose of price discrimination is to capture the market’s consumer surplus and generate the maximum revenue possible for the good or service.

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