1.2.4 Price elasticity of demand (PED)

Question 1

PED

Answer 1

• measures how responsive demand is to changes in price (not very responsive,/very)
• gradient = steepness of demand curve
• elastic = shallow
• inelastic = steep

Question 2

elastic demand curve

Answer 2

-demand curve is elastic when a % change in price = a proportionally larger % change in quantity demanded
shallow gradient

Question 3

inelastic demand curve

Answer 3

-a demand curve is inelastic when a % change in price results in a proportionally smaller % change in quantity demanded
steep gradient

Question 4

influences on PED

Answer 4

• type of product (luxury vs necessity)
• nature of product (perfectly elastic = 0 PED e.g. insulin)
• available substitutes
• consumer income
• willingness of consumers to try new products

Question 5

link with PED and total revenue

Answer 5

-inelastic goods: price increase total rev increases, price decreases total rev decreases

-elastic goods: price increase total rev decreases (less customers buying = so less revenue made)
price falls total rev increases

Question 6

elasticity coefficient

Answer 6

measure of response of one variable to changes in another variable (change in x divided by change in y)

> 1 = price is elastic (decrease P increase QD increase TR)
% change in price = greater proportionate %change in QD

<1 = price is inelastic (raise P decrease QD increase TR)
% change in price - lesser proportionate % change in QD

=1. unitary elasticity
% change in price = equal proportionate % change in QD

0 = perfectly inelastic (change highest price as want) 
infinity = perfectly elastic (increase P above point D disappear

Question 7

formulae for elasticity coefficient

Answer 7

% change in quantity demanded (QD) divided by

% change in price