1.2.4 - Price Elasticity of Demand (PED)

Question 1

PED formula

Answer 1

Change in quantity demanded / Change in price

Question 2

Formula of % change

Answer 2

new - old / old x 100

Question 3

What is the type of good when the numerical value is >1

Answer 3

Elastic

Question 4

What does an elastic mean?

Answer 4

Demand is more responsive to a change in price
- Luxury products

Question 5

What type of good is the numerical value between 0 and 1?

Answer 5

Inelastic

Question 6

What does an inelastic good mean?

Answer 6

Demand is less responsive to a change in price
- Necessities and addictive products

Question 7

Factors that affect the PED and how they affect

Answer 7

1. Brand loyalty
   - More inelastic if there is less substitutes and more loyal
2. Proportion of income
   - Small income spent on something then more inelastic
3. Time
   - Longer time to think is more elastic as can find substitutes
4. Luxury or Necessity
   - If luxury then more elastic

Question 8

Significance of PED to a business

Answer 8

If they can determine they can adjust pricing strategy to maximise their revenue

Question 9

What would a business do if their product is generally inelastic?

Answer 9

If they raise the price it would lead to a raise in revenue
- Price skimming best employed

Question 10

What would a business do if their product is generally elastic?

Answer 10

Raising the price will lead to a fall in revenue but a lower price will increase
- Competitive pricing strategies are best employed