1.2.4, 1.2.5 PED and YED

Question 1

What is price elasticity of demand (PED)

Answer 1

How much demand for a product/service is effected by a change in price

                         % change in quantity demanded  Price elasticity = ————————————————
                                     % change in price

Question 2

Explain what is meant by price elastic

Answer 2

Price elastic products are sensitive to a change in price. Demand will change with a change in price
The calculated value will be greater than 1

Question 3

Explain what is meant by price inelastic

Answer 3

This is when a change in price does not affect demand
The calculated value will be less than 1

Question 4

What factors reduce price elasticity

Answer 4

• when the product becomes more of a necessity, it makes them more inelastic
• differentiating the product builds brand loyalty making customers less likely to switch for lower prices

Question 5

What factors increase price elasticity

Answer 5

• if a product has lots of competition or substitute products customers are more likely to change as a result of a price change
• the internet makes it easier for customers to find substitutes so products are more elastic

Question 6

What is income elasticity of demand (YED)

Answer 6

Show how demand for a product or service changes as income changes

                                                   % change in quantity demanded  Income elasticity of demand = ————————————————
                                                               % change in income

Question 7

What are necessity products

Answer 7

They have a positive YED thats less than one
This means that as incomes rise so does demand but at a slower rate

Question 8

What are luxury products

Answer 8

They have a positive YED thats greater than 1
This means that demand grows higher than the increases in income

Question 9

What are inferior products

Answer 9

Cheaper value products that have a negative YED
Demand for these products rise as income falls and as incomes rise demand falls

Question 10

How can a business use elasticity

Answer 10

• price elasticity helps a business with their pricing strategy, price elastic products would set low and competitive prices whereas an inelastic product would use high prices and price skimming
• YED helps predict what will happen if the economy grows or shrinks
• can help businesses decide when to market the right products or ranges e.g. during times of low income Sainsbury’s may promote their negative YED products