1.7 Price Elasticity Of Demand

Question 1

Price elasticity of demand

Answer 1

Price Elasticity of Demand (PED) measures how the quantity demanded of a good responds to a change in its price. It indicates the sensitivity of consumers to price changes.

Question 2

Fórmula of PED

Answer 2

% change in quantity demanded DIVIDED BY % change in price

. Positive value: Indicates a direct relationship (common in normal goods).
. Negative value: Indicates an inverse relationship (common in demand curves, often reported as positive for simplicity).

Question 3

Types of price elasticity of demand: price inelastic demand (PED < 1)

Answer 3

Characteristics:
. Demand changes less than proportionately to price changes.
. Consumers are less responsive to price changes.
Example: Necessities like fuel or basic food items.

Question 4

Types of price elasticity of demand: price elastic demand (PED > 1)

Answer 4

Characteristics:
. Demand changes more than proportionately to price changes.
. Consumers are more responsive to price changes.
Example: Luxury goods or products with many substitutes.

Question 5

Types of price elasticity of demand: unitary elastic demand (PED = 1)

Answer 5

. Demand changes proportionally with price changes

Question 6

Factors Influencing Price Elasticity of Demand: availability of substitutes

Answer 6

. More substitutes = more elastic demand
. Example: butter VS margarine

Question 7

Factors Influencing Price Elasticity of Demand: necessity VS luxury

Answer 7

. Necessities tend to have inelastic demand: luxuries are often elastic

Question 8

Factors Influencing Price Elasticity of Demand: time period

Answer 8

Demand may become more elastic over time as consumers find substitutes.

Question 9

Factors Influencing Price Elasticity of Demand: proportion of income

Answer 9

Items that take up a large portion of income tend to have more elastic demand.
. Example: Cars vs. matches.

Question 10

Factors influencing price elasticity of demand: branding and loyalty

Answer 10

Strong brands can make demand more inelastic due to consumer loyalty.

Question 11

Factors influencing price elasticity of demand: implications for businesses -> pricing strategy

Answer 11

. Inelastic Demand: Price increases can lead to higher total revenue.
Example: Utility companies often raise prices without significant drops in demand.

. Elastic Demand: Price increases can lead to lower total revenue; firms should consider lowering prices to boost sales.
Example: Retailers may offer discounts during sales.

Question 12

Factors influencing price elasticity of demand: implications for businesses -> total revenue calculation

Answer 12

Total revenue = price X quantity
-> understanding how PED affects tortal revenue can guide pricing decisions

Question 13

Factors influencing price elasticity of demand: implications for businesses -> market competition

Answer 13

In competitive markets, firms must understand the elasticity of demand to set prices that maximise revenue without losing customers to competitors.

Question 14

Cruciality of elasticity of demand

Answer 14

Elasticity of demand is crucial for businesses in developing effective pricing strategies. By recognising the nature of their products’ demand elasticity, companies can make informed decisions that maximise revenue and market share.

. Inelastic demand: price increases -> TR increases
. Elastic demand -> price increases -> TR decreases