1.2.4 PED Flashcards
What does PED stand for
Price elasticity of demand
What is PED
Is a measure of how responsive demand is to a change in price
What type of relationship is there between price and demand
Inverse
If price increases by 10% and demand falls by 5% is it inelastic or elastic and why
Inelastic as the fall in demand is less than the fall I price
If price increases by 10% and demand falls by 13% is it elastic or inelastic and why
Elastic as the all in demand is greater than the fall in price
What is price elastic demand
That a change in price will lead to a more than proportional change in demand
Eg demand is more sensitive to price changes
What is price inelastic demand
A change in price will lead to a less than proportional change in demand
How do you calculate price elasticity
%change in quantity demanded / %change in price
What is inflation
General rose in price above wages
If PED is between 0 and -1 then demand is
Price inelastic
If PES is less than -1 then demand is
Price elastic
Factors that affect the value of PED coefficient include
- Availability of substitutes
- the price of competitor goods
- time
- branding
- income
Explain how the availability will effect the value of PED coefficient
The closer the substitute and the more that are available the huger the price elasticity of demand
Explain how the price of competitor goods will effect the value of PED coefficient
If the price of goods in competition with a product increases this will effect demand and price elasticity if demand
Explain how time will effect the value of PED coefficient
The longer the time period the higher the price elasticity of demand. Given more time other firms have the ability to produce similar products and customers have more change if adapting their buying habits
Explain how branding will effect the value of PED coefficient
Firms spend time and money building up their brand image . By creating brand loyalty firms know that their customers will be willing to pay more for the product and they can therefore raise prices as the PED is lower
Explain how income will effect the value of PED coefficient
If customers incomes are higher than the isssue of price becomes less important to the consumer and it is easier for firms to raise price as the PED Is Lower
A Luxury good will be price ?
As demand will be ? Sensitive to changes in price
Elastic
More
A necessity good will be price ?
As demand will be ? Sensitive to change In price
Inelastic
Less
Why do company’s care about PED
Businesses want to know how a change in price will impact on revenue
This will help determine whether changing price is a good or bad marketing strategy
How does raising the selling price effect elastic demand
Sales revenue decreases
How does easing selling price effect inelastic demand
Sales revenue increases
How does lowing the selling price effect elastic demand
Sales revenue increases
How do lower selling price effect inelastic demand
Sales revenue decreases
