What is PED
The price of a product or service has a direct effect on its demand and this can be predicted through a measure called the Price Elasticity of Demand (PED). Price elasticity refers to the willingness of customers to purchase something at various prices. Price inelastic means people will purchase item x regardless of the price, whereas price elastic means most people will only purchase item x at a few different prices. Each product or service has a different level of elasticity, but there are a few main features which help to determine where they fit on the scale.
Features of an elastic product
- A wide choice of brands available and several alternative products to chose from.
- No one brand dominating the market.
- A price is visible when buying.
- There are low levels of brand differentiation.
A good example can be the shares traded on commodity markets because many are non-branded (eg. exchange traded funds), there is a wide choice available, the price is very visible and is what most investor’s really care about.
Features of an inelastic product
- Not many branded choices available.
- One brand is dominating the market.
- Low visibility of price when purchasing.
- Brand preference and differentiation is high.
Many inelastic products are considered to be essentials. Some examples include bread, milk, eggs and a pack of cigarettes. Although there is no dominance in the cigarette market, there is a high preference and differentiation amongst brands, so price changes will not significantly affect demand.
Each product or service’s price elasticity of demand should be an important indicator of its market price.
A random example:
100 televisions were sold for £100 each = £10,000
Whereas 200 televisions were sold at £90 each = £18,000
The example above clearly demonstrates the power of a change of price, through its domino-style relationship with demand and revenue respectively.
