1.2.4 Price Elasticity of Demand

Question 1

What does price elasticity of demand measure?

Answer 1

• Measures the responsivness of quantity demanded given a change in price

Question 2

What is the formula for PED?

Answer 2

%change in quantity demanded/ %change in price

The PED value is always negative

Question 3

How do you calculate percentage change?

Answer 3

New value - Old value/Old value x100

this is sometimes needed before working out PED

Question 4

Why is PED always negative?

Answer 4

• Due to the inverse relationship between price and quantity
• If the price goes up, the quantity demanded goes down
• If the price goes down, the quantity demanded goes up

Question 5

What is inelastic demand?

Answer 5

• If the demand for a product doesn’t change much with a change in price

e.g. petrol

Question 6

What is elastic demand?

Answer 6

• If the demand for a product changes a lot with a change in price

Question 7

When is the demand inelastic?

Answer 7

• When it is between 0 and -1

Question 8

When is the demand elastic?

Answer 8

• If the PED is more than -1

Question 9

What is a unitary elastic good?

Answer 9

• Has a change in demand which is equal to the change in price
  e.g. a 10% change in price leads to a 10% change in demand

Question 10

What are the factors that affect the PED?

Answer 10

• Substitutes
• Percentage of income
• Luxury/Necessity
• Addictive
• Time (period)

SPLAT

Question 11

How do substitutes affect PED?

Answer 11

PED will be more price inelastic (lower) for goods that have fewer substitutes

The more substitutes there are the more elastic PED would be

Question 12

How does percentage of income affect PED?

Answer 12

• The smaller the proportion of income we spend on a product the more price inelastic the demand will be

E.g. A small amount of income is spent on salt and so the demand for salt will be more price inelastic

Whereas buying a new car takes up a bigger proportion of consumer income and so is more price elastic in demand

Question 13

How does luxury or necessity affect PED?

Answer 13

• Necessities are required as part of consumers’ daily needs- more price inelastic in demand
• Luxury’s aren’t essential so will be inelastic

Question 14

How can a product being addictive affect PED?

Answer 14

• The more addictive the product is the more inelastic it becomes to consumer

Question 15

How does time affect PED?

Answer 15

• The longer the time period under consideration the more price elastic the demand for a good or service is likely to be (consumers have more time to search for substitutes)
• The shorter the time period under consideration the more price inelastic the demand for a good or service is likely to be

E.g. If the price of petrol increases making driving more expensive, there is little that consumers can do in the short term. However, they may switch to alternatives such as public transport or bicycles in the long term

Question 16

How can a business maximise their revenue if their product is inelastic?

Answer 16

• Raising the price will lead to an increase in total revenue.

Price skimming strategies are best for products that are price inelastic in demand

Question 17

How can a business maximise their revenue if their product is elastic?

Answer 17

• Raising the price will lead to a fall in total revenue.
• However, lowering the price will lead to a rise in total revenue
• Competitive pricing strategies are best for products that are price elastic in demand