1.2.4 Price elasticity of demand (PED)

Question 1

What is price elasticity of demand (PED)?

Answer 1

It calculates how responsive quantity demanded is to a change in price (can be elastic or inelastic).
- The PED value is always negative.

Question 1

What is the formula for price elasticity of demand (PED)?

Answer 1

% change in quantity demanded ÷ % change in price

Question 2

What is the formula for % change?

Answer 2

(change in values ÷ old value) x 100

Question 3

What is an elastic good?

Answer 3

Luxury products or products which can be substituted easily.
- Demand is more responsive to a change in price.
- More than 1.

Question 4

What is an inelastic good?

Answer 4

Necessity products such as milk or toothpaste and addictive products such as cigarettes.
They cannot be substituted easily.
- Demand is less responsive to a change in price.
- Between 0 and 1.

Question 5

What are the factors influencing the price elasticity of demand (PED)?

Answer 5

• Availability of substitutes
• Proportion of income spent
• Luxury or necessity
• Time
• Brand loyalty

Question 6

How does the availability of substitutes influence PED?

Answer 6

• PED will be more price inelastic (lower) for goods that have fewer substitutes.
• PED will be more price elastic (higher) for goods that have more substitutes.

Question 7

How does the proportion of income spent influence PED?

Answer 7

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

Question 8

How will a good being either a luxury or a necessity influence PED?

Answer 8

• 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 9

How does time influence PED?

Answer 9

• The longer the time period under consideration, the more price elastic the demand for a good or service is likely to be.
• The shorter the time period under consideration, the more price inelastic the demand for a good or service is likely to be.

Question 10

How does brand loyalty influence PED?

Answer 10

The aim of advertising and marketing expenditure by a business is to shift the demand curve to the right and make the demand more price inelastic by increasing consumer loyalty.