1.2.4 Price Elasticity Of Demand

Question 1

What is PED

Answer 1

When there is an increase in price there will be a fall in the quantity demanded and when there is a fall in price there will be an increase in the quantity demanded
The price elasticity of demand helps us to calculate how responsive the change in quantity demanded will be to a change in price

Question 2

PED calculation

Answer 2

% change in quantity demanded and/ % change in price

Question 3

Interpretation of PED numerical values

Answer 3

> 1 = elastic = demand is more responsive to a change in price e.g. luxury goods
0-1 =-1 inelastic = demand is less responsive to a change in price e.g. necessities

Question 4

Factors influencing the price elasticity of demand

Answer 4

• availability of substitutes = fewer substitutes makes it more inelastic
• proportion of income spent = the smaller the proportion of income we spend on a product the more price inelastic the demand will be
• brand loyalty = makes demand more price inelastic
• time = the longer the time period under consideration the more price elastic for demand for a good or service is likely to be (consumers have more time to search for substitutes
• luxury or necessity = necessities are required as part of consumers daily needs and are therefore more price inelastic in demand, luxuries are not essential and are therefore more price elastic in demand

Question 5

The significance of PED to businesses

Answer 5

• if businesses can determine the price elasticity of demand for their products, they can adjust their pricing strategy to maximise their revenue
• For price inelastic products, raising the price will lead to an increase in total revenue however lowering the price will lead to a fall in total revenue
• Full price elastic products, raising the price will lead to a fall in total revenue however lowering the price will lead to arise in total revenue