1.2|1 Price Elasticity Of Demand (PED)

Question 1

What is Elasticity ?

Answer 1

Measures the responsiveness of Quantity Demanded (QD) to changes in Price (P).

Question 2

How is PED Calculated ?

Answer 2

% Change QD / % Change P

Question 3

What are the factors that affect PED ?

Answer 3

1. Number of Substitutes
2. Percentage Of Income Spent
3. Habit Forming (eg. addiction)
4. Necessity Or Luxury
5. Time
6. Width of Market Definition
7. Cost Of Switching
8. Peak Vs Off Peak

Question 4

What is Width Of Market ?

Answer 4

Measure of how many consumers are able to buy a product/service within a specific time frame.

Question 5

What is the relationship for most goods between quantity demanded and price ?

Answer 5

Inverse

Question 6

What is the value of PED when the good has a Price Elastic Demand ?

Answer 6

Below -1 (More then proportionate response)

Question 7

What is the value of PED when the good has a Price Inelastic Demand ?

Answer 7

Between 0 and -1 (Less then proportionate response)

Question 8

What is the value of PED when the good has a Unitary Price Elasticity of
Demand ?

Answer 8

Equal to -1 (Exactly proportionate)

Question 9

What is Total Revenue ?

Answer 9

The amount of money that businesses receive from selling their products.

Question 10

What is the formula for Total Revenue ?

Answer 10

TR = Selling Price X Quantity Sold

Question 11

What happens to TR if demand is elastic and price reduces ?

Answer 11

Increases

Question 12

What happens to TR if demand is inelastic and price increases ?

Answer 12

Increases