1.2.3 elasticity of demand

Question 1

Define PED?

Answer 1

The responsiveness of demande to a change in price.

PRICE INELASTIC = <1 = more vertical demand line
PRICE ELASTIC = >1 = more horizontal demand line

Question 2

Formula for PED?

Answer 2

PED = %change in qty demanded /
%change in price

Question 3

What does perfectly (in)elastic mean?

Answer 3

Perf elastic = buyers prepared to buy all they can at a given price but none at a higher price.

Perf inelastic = demand is not at all responsive to a change in price. A change in price will result in no change in qty demanded.

Question 4

How do you calculate revenue?

Answer 4

Price X Quantity

Question 5

What determines the PED?

Answer 5

• Number and closeness of subsitutes
• proportion of income spent on good
• easier it is to postpone purchase (ie holiday)
• time period

Question 6

What is XED

Answer 6

Cross elasticity of demand - the responsiveness in the quantity demanded of one product to a change in the price of another.
POSITIVE XED = subsitutes (price in 1 increases = people swap to sub)
NEGATIVE XED = complementary (price of 1 increases = demand for other falls)

Question 7

What is YED

Answer 7

responsiveness of qty demanded in response to change in income.

negative = inferior good = IE tesco beans
positive = normal good (necessity goods AND luxury goods) increase demand with income.