2.3 Price Elasticity of Demand

Question 1

Define price elasticity of demand?

Answer 1

measures the responsiveness of demand after a change in the goods own price

Question 2

PED formula?

Answer 2

% change in quantity demanded / % change in price

Question 3

Explain the graph and reason for the coefficient PED = 0

Answer 3

• perfectly inelastic
• demand does not change when the price changes
• implies consumers are willing and able to pay any price for a product

Question 4

Explain the graph and reason for the coefficient PED is between 0 and 1?

Answer 4

• relatively inelastic

- % change in demand is smaller than the percentage change in price

Question 5

Explain the graph and reason for the coefficient PED = 1

Answer 5

• unitary elastic
• % change in demand is the same as the % change in price
• proportionate change in demand

Question 6

Explain the graph and reason for the coefficient

PED > 1

Answer 6

• relatively elastic

- demand responds more than proportionately to a change in price

Question 7

Explain the graph and reason for the coefficient PED is infinite?

Answer 7

• perfectly elastic

Question 8

perfectly inelastic impact on total revenue of an increase in price?

Answer 8

• increase by same % as price

Question 9

perfectly inelastic impact on total revenue of a decrease in price?

Answer 9

decrease revenue by same % as price

Question 10

relatively inelastic impact on total revenue of an increase in price?

Answer 10

increase revenue

Question 11

relatively inelastic inelastic impact on total revenue of a decrease in price?

Answer 11

decrease revenue

Question 12

unitary elastic impact on total revenue of an increase in price?

Answer 12

No change

Question 13

unitary elastic impact on total revenue of a decrease in price?

Answer 13

no change

Question 14

relatively elastic impact on total revenue of an increase in price?

Answer 14

decrease revenue

Question 15

relatively elastic impact on total revenue of a decrease in price?

Answer 15

increase revenue

Question 16

Perfectly elastic impact on total revenue of an increase in price?

Answer 16

fall to 0

Question 17

Perfectly elastic impact on total revenue of a decrease in price?

Answer 17

decrease

Question 18

For a straight line demand curve the PED?

Answer 18

varies along the curve

Question 19

What happens on a straight line demand curve to the PED at high prices ?

Answer 19

a reduction in price will have an elastic responce (lower prices cause revenue to rise)

Question 20

What happens on a straight line demand curve to the PED at low prices ?

Answer 20

the demand is inelastic , fall in price causes revenue to drop

Question 21

Five factors that determine the PED?

Answer 21

• number of close substitutes
• • price of product in relation to total income
• cost of substituting between differant products
• brand loyalty + habitual consumption
• degree of necessity/ luxury

Question 22

What can firms use PED estimates to predict?

Answer 22

• effect of change in price on total revenue of sellers
• price volatility in a market following changes in supply
• effect of change in indirect tax on price and quantity demanded