2.2 Firms, Consumers and Elasticities of Demand

Question 1

Define elasticity

Answer 1

How much one variable changes in response to a change in another related variable

Question 2

What is PED

Answer 2

Price elasticity of demand - measures the responsiveness of quantity demanded to a change in price

Question 3

Why are those selling to mass markets more affected by PED than niche markets

Answer 3

Mass market products are likely to be standardised and have many substitutes therefore a change in price is likely to impact them more than a niche

Question 4

What’s the formula for PED

Answer 4

% change of quantity demanded / % change in price

Question 5

When the PED answer is beyond -1 (a number greater than one) what does this mean

Answer 5

It’s price elastic - a change in price will have a larger change of demand - price sensitive

Question 6

When the PED answer is between 0 and -1 (a decimal) what does this mean

Answer 6

It’s price inelastic - a change in price will bring about a smaller change in the quantity demanded - price insensitive

Question 7

What factors affect PED (5)

Answer 7

Substitutes
Proportion of income (basically how much it costs)
Luxury or necessity (luxuries are elastic)
Addiction (inelastic - they’ll pay whatever)
Time (more elastic as time goes on)

Question 8

How can PED help businesses set their prices

Answer 8

PED helps show if their products are elastic or inelastic. It also shows how much total revenue they’ll make, for example, if they put they price up and the product is elastic, the change in demand will reduce sales more than they’ll make by putting up the price

Question 9

What does the inelastic demand curve look like?

Answer 9

Really steep
Axes - Price and Quantity
P on side, Q on bottom
Don’t forget your equilibriums and labelling the curve

Question 10

What does the elastic demand curve look like?

Answer 10

Almost flat
Axes - Price and Quantity
P on side, Q on bottom
Don’t forget your equilibriums and labelling the curve

Question 11

What is PED dependent upon?

Answer 11

How much the price or quantity changes by
The type of product
SPLAT

Question 12

If demand is price elastic what would happen to total revenue if you:

a) increased prices
b) reduced prices

Answer 12

a) TR would decrease
b) TR would increase

The opposite would happen

Question 13

If demand is price inelastic what would happen to total revenue if you:

a) increased prices
b) reduced prices

Answer 13

a) Increase TR
b) Decrease TR

It would have the same impact on TR

Question 14

How does the government respond to PED inelastic goods

Answer 14

They put direct taxes on them so they don’t sell loads of them

e.g. alcohol, cigarettes, sugar

Question 15

What does the pricing strategy depend upon

Answer 15

The competition
Is the product differentiated in any way
Is the economy in a boom or recession

Question 16

What are the 6 pricing strategies

Answer 16

Cost-plus (adding a % on top)
Price skimming (really high)
Penetration pricing (low)
Predatory pricing (illegal)
Competitive pricing 
Psychological pricing (99p seems cheaper than £1)

Question 17

Which pricing strategy is the most appropriate for:

a) A high degree of differentiation/USP
b) Price elastic
c) Introductory stage of the product life cycle
d) the business need a profit

Answer 17

a) price skimming - shows quality
b) competitive pricing - many substitutes so can’t compete on price
c) Penetration - to attract sales
d) Cost-plus - ensures a profit

Question 18

What 2 functions does marketing have on the demand curve?

Answer 18

• Shift right - So at each price, more is demanded than before
• To reduce PED (become inelastic) which steepens the curve

Question 19

Give real-life examples of where the following have been successful?

a) product differentiation
b) Product innovation
c) advertising and promotion
d) distribution methods

Answer 19

a) Uber
b) Samsung VR
c) GU
d) Deliveroo

Question 20

What does non-price competition include

Answer 20

Quality. design, branding, advertising, customer service, reliability, promotion, packaging, public relations, sponsorship, etc…

Question 21

What is income elasticity of demand

Answer 21

Measures the responsiveness of quantity demanded to a change in income

Question 22

What’s the YED formula

Answer 22

% change in quantity demanded / % change in price

Question 23

What does it mean if the YED answer is greater than 1

Answer 23

Income elastic - A change in income causes a greater change in quantity demanded - income sensitive

Question 24

What does it mean if the YED is between 0 and 1

Answer 24

Income inelastic - a change in income causes a smaller change in quantity demanded - income insensitive

Question 25

What does it mean if the YED answer is 1

Answer 25

Unitary income elastic - A change in price causes the same change in quantity demanded

Question 26

What does it mean if PED is -1

Answer 26

Unit price elastic - A change in price causes the same change in QD

Question 27

What’s the difference between normal and inferior goods with YED

Answer 27

Normal goods have a positive YED as income rise 
Inferior goods (pound land) have a negative YED as income rises

Question 28

What’s YED mainly dependent upon

Answer 28

If the good is normal or inferior

Question 29

Why can luxuries be seen as income elastic

Answer 29

Luxuries are likely to be bought as income rise, not when the fall

Question 30

Why are luxury goods price elastic

Answer 30

The best way to explain it is if you think of apple’s iphone X. If they were to reduce the price by £100 they’d receive many more sales as it’s price sensitive, you’re more likely to but it if it’s £900 than if it’s £1000. However, it could be argued that it’s inelastic because it’s still expensive, a large drop in price like this may not have much impact on demand because the proportion of income is still really high

Question 31

How is YED closely liked to the economic cycle

Answer 31

An economic recession/boom is likely to impact everybody’s income