3 Flashcards
PED
Definition: a measure of the responsiveness of the quantity of a
good demanded to changes in its price
Large responsiveness of quantity demanded
Price elasticity
To calculate PED
Percentage change in quantity demanded/percentage change in price
Why percentage in formula for PED
To compare the responsiveness of quantity demanded of
different goods with no currency limitations; To measure the RELATIVE size of change
A luxury sports utility vehicle (SUV) retails for £40,000 in the UK in
July. 7000 SUVs are sold in July.
In August, the vehicle is marked down to £37,000. 7200 SUVs are
sold in August
Assuming no other variable changed between July and August,
how responsive are UK consumers to the change in price of this
SUV
The price elasticity of demand for these SUVs between 40k and 37k in the UK is -0.37%. A fall in price of 7.5 led to an increase in quantity demanded of 2.9%. Another way to interperate this is that for every 1% decrease in price, the quantity demanded increased of 0.36%
Inelastic demand ><
0<PED<1
Inelastic demand
Quantity demanded is relatively unresponsive to price
Elastic demand ><
1<PED<infinity
Elastic demand
Quantity demanded is relatively responsive to price
Unit elastic demand ><
PED=1
Perfectly Inelastic demand
PED=0
Perfectly Inelastic deman
Quantity demanded is completely unresponsive to price
Perfectly elastic demand ><
PED=infinity
Perfectly elastic demand
Quantity demanded is infinitely responsive to price
When PED varies on demand curve
On any downward-sloping, straight-line demand curve, demand is:
Price-elastic at high prices & low quantities;
Price-inelastic at low price & large quantities.
At the midpoint of the demand curve, there is unit elastic demand.
Thus, the term ‘elastic’ and ‘inelastic’ should not be used to refer to an entire demand curve.
Instead, they should be used to refer to a portion of the demand curve
that corresponds to a particular price or price range
Determinants of PED
Substitues, proportion of income, luxury or necessity, addictive or not, time to respond
Substitutes
Number & Closeness of
substitutes
*How broadly or narrowly we
define the good
*the more substitutes, consumers
are more responsive, the more price elastic it its deman
Proportion of income
The larger the proportion of one’s income needed to buy a good,
The impact is more significant,
the more price elastic the demand
Luxury or necessity
More luxurious,
less necessary,
more price elastic
Addictive or not
The greater the degree of addition to a substance,
The more price inelastic is the demand
Time to respond
Longer time period in which a consumer makes
a purchasing decision, the more price elastic
the demand
Total revenue
The amount of money received by firm when they sell a good or service
How Total revenue is calculates
P*Q
PED>1 effect on total revenue
Price increases, TR decreases and vice versa
PED<1 effect on total revenue
Price increases, TR increases and vice versa
PED = 1
Price changes, TR remains constant
How does total revenue look on a PED graph
Total revenue is at a maximum when price is at the point where demand is
unit elastic
What relates to profit
Nothing
Primary comodities
Primary commodities: goods arising directly from the use of natural resources.
“Land
Generally, primary commodities have a lower PED than manufactured
products, because
● they are necessities and have no substitutes
How government tex revenue is dependant on PED
○ The lower the price elasticity of demand of the taxed good, the greater the
government tax revenues
● What type of goods government would like to impose indirect
taxes
Goods with low PED
