2.6 elasticity PED

Question 1

What is elasticity?

Answer 1

a measure of the sensitivity of one variable to changes in another variable

Question 2

Consider the price of these two goods/ services increase by 10% :
- a holiday to Florida
- milk
What will happen to the demand?
Will the proportional change in demand for both goods be the same? Why?
( use diagrams in your answer )

Answer 2

The quantity demand would fall for both. However the proportional change in demand for the holidays will fall more in demand than in the milk.

Question 3

What is PED?

Answer 3

The most common elasticity measure is price elasticity of demand:
“ which measures the responsiveness of the QD given a change in the P “

Question 4

How do we calculate PED?

Answer 4

The elasticity is defined as the percentage change in the QD divided by the percentage change in P.

Question 5

What are the key points to note when calculating PED?

Answer 5

1. The PED calculation will always be negative this is because the demand curve is downwards sloping and therefore changes in QD and P are in the opposite direction therefore one must be negative.
2. Only use PED for small price changes - the bigger the change the more unreliable it gets

Question 6

What is the term price elasticity?

Answer 6

A term used when the price elasticity is less than -1 but less than - infinity. The proportional change in QD will be greater than a related proportional change in P.

Question 7

If a Mars bars price changed from 50p to 40p and the demand for mars bars increased from 100 to 300 a day what is the PED?

Answer 7

50p - 40p = 10p/ 50p x 100 =-2%
300-100= 200/ 100 x100 = 200%
-2% /200% =

Question 8

Price elastic goods

Answer 8

Price elastic goods tend to be luxury or superior goods such as expensive sports cars or high quality shoes because as the price increases people opt for less of them or alternatively if the price falls QD increase’s proportionally more than the price fall.

Question 9

What is the term price inelastic?

Answer 9

A term used when the price elasticity is between 0 and -1. The proportional change in QD is less that the related proportional change in P.

Question 10

The price of petrol has increased from £7 to £8 per gallon and due to this demand for petrol has declined from 50,000 to 48,000 gallons. Calculate the PED.

Answer 10

50,000-48,000=2,000/50,000x100= -4 %
£7-£8=£1/£7x100= 14.28%
-4%/14.28%=-0.28
Therefore it is inelastic.

Question 11

Inelastic goods

Answer 11

Inelastic goods tend to be necessities such as petrol because people buy them no matter what price.