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economics > 1.2.3 Price Elasticity Of Demand > Flashcards

1.2.3 Price Elasticity Of Demand Flashcards

1
Q

Define PED

A

Measures the responsiveness of quantity demanded after a change in a product’s own price.

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2
Q

What is the formula for PED

A

%change in quantity demanded/%change in price

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3
Q

Define inelastic PED

A

The percentage change in quantity demanded is less than the percentage change in price

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4
Q

Give examples of things with an inelastic PED

A

Cigarettes, petrol
Goods and services that do not have many substitutes or are necessities or addictive

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5
Q

Define elastic PED

A

When the percentage change in quantity demanded is more than the percentage change in price

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6
Q

Give examples of things with an elastic PED

A

Designer clothes
Goods and services that do not have many substitutes or are luxuries

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7
Q

What is the PED value for a perfectly inelastic good

A

0

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8
Q

Give an example of a perfectly inelastic good

A

Hard drugs

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9
Q

What is the PED value for a price inelastic good

A

0-1

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10
Q

What is the PED value for a unitary elastic good

A

1

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11
Q

What is the PED value for a price elastic good

A

1-infinity

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12
Q

What is the PED value for a perfectly elastic good

A

Infinity

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13
Q

What are the six factors affecting PED

A

Proportion of income
Loyalty
Addicitiveness
Necessity or luxury
Time period
Substitute availability

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14
Q

Explain how proportion of income affects PED

A

The larger proportion of income a good constitutes, the more responsive its consumers will be to changes in price (elastic).
If a good only constitutes a small proportion of income demand is likely to be price inelastic

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15
Q

Explain how brand loyalty affects PED

A

if a consumer really likes a brand and prefers it over others then it will. E more price inelastic

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16
Q

Explain how addictiveness affects PED

A

if a product is addictive or forms part of someone’s everyday life then they will be more price inelastic

17
Q

Explain how necessity or luxury affects PED

A

A luxury gold will be more price elastic as demand will be more sensitive to changes in price
A necessity good will be price inelastic as demand will be less sensitive to changes in price A necessity

18
Q

Explain how time period affects PED

A

the longer the time period the higher the PED (elastic). Given more time other firms have the ability to produce similar products and customers have more chance of adapting their buying habits

19
Q

Explain how substitute availability affects PED

A

The closer the substitutes and the more that are available the higher the PED (more elastic)

20
Q

What is perfectly inelastic demand

A

Quantity demanded is entirely unresponsive to a change in price

21
Q

What it unitary elastic demand

A

Quantity demanded changes at the same rate as price

22
Q

What is perfectly elastic demand

A

A price increase will lead to no demand whereas a price decrease will lead to an infinite amount of demand

23
Q

What is PED data useful for

A

Firms - in making decisions on price
Government- in making decisions on tax

24
Q

Firms TR: what happens if demand is price inelastic

A

Firms should increase price as demand will fall by a smaller proportion and total revenue will rise

25
Q

Government TR- what happens if demand demand is price inelastic

A

Governments should impose tax on these goods as demand falls by a smaller proportion, raising significant tax revenue. If the government subsidised such a product, the resulting price fall would not stimulate demand significantly

26
Q

What may successive price rises cause

A

May make the good elastic in demand as consumers decide to cut back in expenditure as it has become far too expensive

27
Q

Firms TR: what happens if demand is price elastic

A

Firms should reduce price as demand will rise by a larger proportion and total revenue will rise

28
Q

Government TR: what happens if demand is price elastic

A

Governments shouldn’t impose tax on these goods as demand falls significantly, causing the firm to contract and redundancies to arise.
However, if the government subsidised such a good, a resulting lower price would increase demand significantly

29
Q

Why may firms not be able to maximise TR for a price elastic good

A

May not be able to cope with the increase in demand if they have limited excess capacity. Also firms may not be able to cut the price if their price is just above average costs

30
Q

Summarise PED and total revenue for each curve

A

Elastic demand- a decrease in price leads to an increase in revenue and an increase in price leads to a decrease in revenue
Inelastic demand- a decrease in price leads to a decrease in revenue and an increase in price leads to an increase in revenue
Unitary elastic- a change in price does not affect total revenue Unitary

31
Q

What are the limitations of PED

A
  • the data may be unreliable as figures are often estimated based on market research. A small sample may be unrepresentative and misleading
  • the data may change over time eg new competitors enter the market, increasing the range of substitutes making demand more price elastic
  • other things may not remain unchanged eg consumer trends
32
Q

Explain how PED changes at high prices

A

There will be low demand so a change in price leads to a large percentage change in demand and as prices are high the price change is a small percentage change
Therefore PED=large%change/small%change so a large figure that is greater than one, demand is price elastic at high prices

33
Q

How does PED change at low prices

A

There will be high demand so a change in price leads to a small percentage change in demand and as prices are low the price change is a large percentage change
Therefore PED=small%change/large%change so a small figure that is less than one, demand is price inelastic at high prices

economics (18 decks)

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