1.2.4 elasticity of demand Flashcards
what does PED stand for
price elasticity of demand
what is the equation for PED
%change in quantity demanded/ % change in price
what does it mean if PED >1 (greater than 1)
that the demand is price elastic, eg -2 or 2
what does it mean if PED <1 (less than 1)
the demand is price inelastic, eg -0.5 or 0.5
what does price elasticity of demand mean
how sensitive the quantity demanded is to its price. When the price rises, quantity demanded falls for almost any good, but it falls more for some than for others
if the ped formula gives you a minus number above 1, is it elastic or inelastic
it is elastic, you dont take into account the minus, 2 is bigger than >1 meaning its elastic
price elastic demand
a change in price results in a greater change in demand
price inelastic demand
a change in price results in proportionately smaller change in demand
how do you calculate percentage change
difference/original number x 100
what factors affect PED
-the availability of substitutes
-the proportion of income spent on a good
-if the good is a luxury or a necessity
-time
how does the availability of substitutes affect PED
if a product is in a mass market, there will be lots of competition selling similar products. many will be very similar and cheaper. if a business raises prices then consumers are more likely to buy the other substitute product to save money. for example if dairy milk increased by 20% then its demand would fall and the demand for galaxy chocolate may increase
how does the proportion of income spent on goods affect PED
if the product is very cheap in the first place, then an increase in price is unlikely to affect the demand.
if the product is more expensive an increase in price is likely to have a much larger impact on the demand.
cheap product will usually be price inelastic as demand wont change much
if you increase the price on a price elastic product what is likely to happen to revenue
the businesses revenue will fall - by increasing the price, it will have a much more significant affect on the demand.
if you decrease the price on a price inelastic product what is likely to happen to revenue
the business revenue will rise - decreasing price will have lead to a large increase in demand
if you increase the price on a price inelastic product what is likely to happen to revenue
the revenue will increase - increasing price will have small effect on demand.
