The Law of Demand states that, ceteris paribus, as the price of a product falls, more will be demanded.
The LAW OF DEMAND states that:
There is an inverse relationship between price and quantity.
As the price of a good or service increases , then ceteris paribus , the quantity demanded of that good or service will fall .
Or if there is a decrease in the price of a good or service, then ceteris paribus, there will be a increase in the quantity demanded
Price elasticity of demand (PED)
Whether there is a price increase or a price decrease, PED measures how much demand changes in response to a change in price.
Determinants of Elasticity
1. Number of substitutes
As the number of substitutes increase the more elastic demand is.
e.g., if a product has no substitutes and the supplier decides to increase prices, then consumers cannot switch to a heaper alternative. Therefore, when prices increase for this product demand will only fall by a small amount.
e.g., in contrast, when a product has a large number of close substitutes, its price elasticity will be very high. If a supplier increases its price, then consumers can easily switch to cheaper alternatives.
2. Time
It usually takes time for consumers to adjust their expenditure patterns following a price change.
Consequently, demand is usually more price elastic in the long run than in the short run.
3. Definition of the market
The definition of the market refers to how broad or narrow the range of goods available is.
Important Elasticity Measures
Income elasticity of demand (YED)
CROSS PRICE elasticity of demand (YED)
Elasticity and the Product Life Cycle
How would elasticity change over the product life cycle?
Hint: think of the number of substitutes