2.4 - Price Elasticity of Demand Flashcards
What is the price elasticity of demand?
The PED of a product is how much the price change affects the demand.
What is the formula for calculating PED?
% change in quantity demanded ÷ % change in price
Why is price elasticity of demand (PED) always negative?
Because a positive change in price causes a negative change in demand, and a negative change in price causes a positive change in demand.
When can you ignore the minus sign in PED?
The minus sign can be ignored when analyzing whether a product is price elastic or inelastic.
What does it mean if the price elasticity of demand is greater than 1 (ignoring the minus sign)?
The product is price elastic, meaning demand changes significantly with a price change.
What does it mean if the price elasticity of demand is less than 1 (ignoring the minus sign)?
The product is price inelastic, meaning demand changes only slightly with a price change.
Give an example of a price elastic PED value.
-1.5 (ignoring the minus sign, this is greater than 1, so it’s price elastic).
Give an example of a price inelastic PED value.
-0.5 (ignoring the minus sign, this is less than 1, so it’s price inelastic).
What happens to demand when a product is price elastic?
The percentage change in demand is greater than the percentage change in price.
What happens to demand when a product is price inelastic?
The percentage change in demand is less than the percentage change in price.
Why are necessity products like milk price inelastic?
Changing the price doesn’t affect demand much because they are essential items.
How does the availability of substitutes affect price elasticity of demand?
If customers can easily switch to similar or competitor products, demand will be price elastic.
How does brand loyalty affect price elasticity of demand?
Loyal customers are less likely to switch, even if the price increases, making the product less price elastic.
Why does price elasticity of demand tend to increase over time?
Customers have more time to find alternatives, and the internet makes it easier to compare and switch to alternatives.
How do product types and individual brands differ in terms of price elasticity?
Product types tend to be price inelastic, while individual brands tend to be price elastic.
How does the proportion of income spent on a product affect price elasticity?
Products that cost a larger proportion of income (e.g., cars) are more price elastic, while smaller-cost items (e.g., newspapers) are less price elastic.
How does the frequency of purchase affect price elasticity of demand?
Frequently purchased products are often necessities and are more likely to be price inelastic.
What can cause the price elasticity of demand to change over time?
- Entry of a competitor increases price elasticity.
- Increased brand awareness creates customer loyalty and reduces price elasticity.
- A product becoming more of a necessity reduces price elasticity (e.g., mobile phones).
Why does entry of a competitor increases price elasticity?
If a competitor were to enter the market, then it would be easier for customers to switch to a different product. This means that the product could become more price elastic.
What does a shallow demand curve represent?
A shallow demand curve represents a price-elastic product, where demand is very dependent on price, and a small price change leads to a large change in demand.
What does a steep demand curve represent?
A steep demand curve represents a price-inelastic product, where demand is not very dependent on price, and a large price change leads to only a small change in demand.
What is the formula for sales revenue?
Sales Revenue = Selling Price x sales volume
What happens to sales revenue if the price of a price-elastic product increases?
Sales revenue decreases because the money lost from the percentage decrease in sales is greater than the money gained from the percentage increase in price.
How can a firm increase sales revenue for a price-elastic product?
By reducing the price. A small price decrease will cause a large increase in demand, increasing sales revenue.
What happens to sales revenue if the price of a price-inelastic product increases?
Sales revenue increases because the money lost from the percentage decrease in sales is less than the money gained from the percentage increase in price.
What happens to sales revenue if the price of a price-inelastic product decreases?
Sales revenue decreases because the price has fallen, and the slight increase in sales volume does not compensate for the lower price.
