1.2.3: (PED) Price Elasticities of Demand

Question 1

What is price elasticity of demand?

Answer 1

• The responsiveness of demand to a change in the price of the good.

Question 2

What is the calculation of PED?

Answer 2

% change in quantity demanded/ %change in price

Question 3

Why are most values of PED negative?

Answer 3

• As a rise in price leads to a fall in output.

Question 4

What is unitary elastic PED?

Answer 4

• Where PED=1
• Quantity demanded changes by exactly the same percentage as price.
• Shown as a reciprocal curve.

Question 5

What is relatively elastic PED?

Answer 5

• Where PED>1
• Quantity demanded changes by a larger percentage than price so demand is relatively responsive to price.
• Curve will be more sloping

Question 6

What is relatively inelastic PED?

Answer 6

• Where PED<1
• Quantity demanded changes by a smaller percentage than price so demand is relatively unresponsive to price.
• the curve will be steep

Question 7

What is perfectly elastic PED?

Answer 7

• Where PED= infinity
• A change in price means that quantity falls to 0 and demand is very responsive to price.
• This would be shown by a horizontal line

Question 8

What is perfectly inelastic PED?

Answer 8

• Where PED=0
• A change in price has no effect on output so demand is completely unresponsive to price
• This would be shown by a vertical line.

Question 9

What are the factors which affect PED?

Answer 9

• Availability of substitutes
• Time
• Necessity
• How large of a % of total expenditure
• Addictive

Question 10

How does availability of substitutes affect PED?

Answer 10

• If a product has lots of substitutes, people will switch to other products when prices go up.
• Therefore, PED will be elastic.
• If there are no substitutes, then the demand curve will be inelastic since even if prices go up, people will have to buy that good if they want it as there are no alternatives.

Question 11

How does time affect PED?

Answer 11

-The longer the time, the easier it will be for a person to find an alternative product/supplier of the product so the more elastic the good is.

Question 12

How does necessity affect PED?

Answer 12

• If you need something, the demand curve will be inelastic because even if the price goes up, you still need to buy it.

Question 13

How does the size of the % of total expenditure

Answer 13

• If a good/service represents a very small percentage of a person’s expenditure, a significant increase in price will have a relatively small impact on how much they buy of that product so it will be inelastic, eg matches

Question 14

How does addiction affect PED?

Answer 14

• If a product is addictive, then the demand curve will be inelastic. No matter how high prices are, people will still buy the good to fufil their addiction.

Question 15

What is the significance of PED?

Answer 15

• The more elastic the demand curve, the lower the incidence of tax on the consumer.
• This means that when PED is elastic, a tax will only lead to a small increase in price and the supplier will have to cover the majority of the cost of the tax.
• When demand is inelastic, the tax will be mainly passed onto the consumer

Question 16

PED & Revenue

Answer 16

• For an elastic demand curve: A decrease in price leads to an increase in revenue and an increase in price leads to a decrease in revenue.
• For an inelastic demand curve: A decrease in price leads to a decrease in revenue and an increase in price leads to an increase in revenue.
• For unitary elastic curve: A change in price does not affect total revenue