1.2.3 Price Elasticity Of Demand

Question 1

Define PED

Answer 1

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

Question 2

What is the formula for PED

Answer 2

%change in quantity demanded/%change in price

Question 3

Define inelastic PED

Answer 3

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

Question 4

Give examples of things with an inelastic PED

Answer 4

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

Question 5

Define elastic PED

Answer 5

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

Question 6

Give examples of things with an elastic PED

Answer 6

Designer clothes
Goods and services that have many substitutes

Question 7

What is the PED value for a perfectly inelastic good

Answer 7

0

Question 8

Give an example of a perfectly inelastic good

Answer 8

Hard drugs

Question 9

What is the PED value for a price inelastic good

Answer 9

0-1

Question 10

What is the PED value for a unitary elastic good

Answer 10

1

Question 11

What is the PED value for a price elastic good

Answer 11

1-infinity

Question 12

What is the PED value for a perfectly elastic good

Answer 12

Infinity

Question 13

What are the six factors affecting PED

Answer 13

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

Question 14

Explain how proportion of income affects PED

Answer 14

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

Question 15

Explain how brand loyalty affects PED

Answer 15

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

Question 16

Explain how addictiveness affects PED

Answer 16

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

Question 17

Explain how necessity or luxury affects PED

Answer 17

A luxury good 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

Question 18

Explain how time period affects PED

Answer 18

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

Question 19

Explain how substitute availability affects PED

Answer 19

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

Question 20

What is perfectly inelastic demand

Answer 20

Quantity demanded is entirely unresponsive to a change in price

Question 21

What it unitary elastic demand

Answer 21

Quantity demanded changes at the same rate as price

Question 22

What is perfectly elastic demand

Answer 22

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

Question 23

What is PED data useful for

Answer 23

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

Question 24

Firms TR: what happens if demand is price inelastic

Answer 24

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

Question 25

Government TR- what happens if demand demand is price inelastic

Answer 25

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

Question 26

What may successive price rises cause

Answer 26

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

Question 27

Firms TR: what happens if demand is price elastic

Answer 27

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

Question 28

Government TR: what happens if demand is price elastic

Answer 28

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

Question 29

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

Answer 29

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

Question 30

Summarise PED and total revenue for each curve

Answer 30

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

Question 31

What are the limitations of PED

Answer 31

- 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

Question 32

Explain how PED changes at high prices

Answer 32

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

Question 33

How does PED change at low prices

Answer 33

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 low prices