1.2.4 Price elasticity of demand (PED)

Question 1

What does PED measure?

1

Answer 1

• Responsiveness of demand for a product to a change in it’s price

Question 2

How do you calculate PED?

1

Answer 2

• %Change in demand

%Change in price

Question 3

How to calculate percentage change?

1

Answer 3

• Change between 2 figs x100

Original price

Question 4

What does a price elasticity of between 0 and -1 mean?

2

Answer 4

• Product = price inelastic

- Changes in price = smaller effect on demand

Question 5

What does a negative price elasticity of 1+ mean?

2

Answer 5

• Product = price elastic

- Changes in price = larger effect on demand

Question 6

What are the factors influencing price elasticity?

3

Answer 6

• Product differentiation
• Substitutes
• Branding/brand loyalty

Question 7

If the product is price elastic and the price is increased, what effect will this have on revenue and why?
2

Answer 7

• Fall

- Small increase in price = large fall in demand

Question 8

If the product is price elastic and the price is decreased, what effect will this have on revenue and why?
2

Answer 8

• Increase

- Small cut = large increase in demand

Question 9

If the product is price inelastic and the price is increased, what effect will this have on revenue and why?
2

Answer 9

• Increase

- Increase in price = small fall in demand

Question 10

If the product is price inelastic and the price is decreased, what effect will this have on revenue and why?
2

Answer 10

• Fall

- Price cut = only small increase in demand

Question 11

What are strategies to reduce price elasticity?

2

Answer 11

• ^Product differentiation

- >Comp through predatory pricing