3 - Price And Income Elasticity Of Demand

Question 1

What Does PED Mean?

Answer 1

Price elasticity of demand.

Question 2

What Is PED?

Answer 2

Measure of how responsive demand is to a change in price.

Question 3

What Type Of Relationship Is There Between Price & Demand?

Answer 3

Inverse relationship.

Question 4

What Does The Inverse Relationship Mean?

Answer 4

As price goes up, demand goes down. Vice Versa.

Question 5

When PED Is Elastic What Does It Mean?

Answer 5

A change in price will lead to a more than proportional change in demand.

Question 6

When PED Is Inelastic What Does It Mean?

Answer 6

A change in price will lead to a less than proportional change in demand.

Question 7

What Is The Formula For PED?

Answer 7

% ∆ In Qd / % ∆ In Price.

Question 8

Is PED Always Negative Or Positive?

Answer 8

Negative.

Question 9

What Does It Mean When PED Is Between 0 & -1?

Answer 9

Demand is price inelastic.

Question 10

What Does It Mean When PED Is Less Than -1?

Answer 10

Demand is price elastic.

Question 11

When Demand Is Price Elastic, What Happens When The Selling Price Is Raised?

Answer 11

Sales revenue will decrease.

Question 12

When Demand Is Price Elastic, What Happens When The Selling Price Is Lowered?

Answer 12

Sales revenue will increase.

Question 13

When Demand Is Price Inelastic, What Happens When The Selling Price Is Raised?

Answer 13

Sales revenue will increase.

Question 14

When Demand Is Price Inelastic, What Happens When The Selling Price Is Lowered?

Answer 14

Sales revenue will decrease.

Question 15

What Are The Factors Influencing PED?
(6 Points)

Answer 15

~ SPLAT.

~ S = Number of substitutes.

~ P = % of income.

~ L = Luxury / Necessity.

~ A = Addictiveness / Habit forming.

~ T = Time period.

Question 16

One Factor Influencing PED Was ‘Number Of Substitutes’ What Does This Mean?

Answer 16

The more substitutes for a certain product the more price elastic demand will be. Vice versa.

Question 17

One Factor Influencing PED Was ‘% Of Income’ What Does This Mean?

Answer 17

The greater the % of income that a price change takes the more price elastic demand will be. Vice Versa.

Question 18

One Factor Influencing PED Was ‘Luxury / Necessity’ What Does This Mean?
(2 Points)

Answer 18

~ Luxury goods tend to have a more price elastic demand.

~ Necessities have more price inelastic demand.

Question 19

One Factor Influencing PED Was ‘Addictiveness / Habit Forming’ What Does This Mean?
(2 Points)

Answer 19

~ If the good is addictive it will have a more price inelastic demand.

~ If the good is habit forming it will have a more price inelastic demand.

Question 20

One Factor Influencing PED Was ‘Time Period’ What Does This Mean?
(2 Points)

Answer 20

~ In the short run demand is more price inelastic as there a fewer substitutes available, consumers don’t have enough time to look for an alternative.

~ In the long run demand is more price elastic as more substitutes become available.

Question 21

Why Is It Difficult For Firms To Measure PED?
(5 Points)

Answer 21

~ Difficult in finding accurate information.

~ Price elasticity changes over different price ranges.

~ Price elasticity will change over the period of the economic cycle.

~ Tastes and fashion are constantly changing.

~ Competitors don’t stand still.

Question 22

What Is YED Mean?

Answer 22

Income elasticity of demand.

Question 23

What Is YED?

Answer 23

A measure of the responsiveness of demand to a change in income.

Question 24

Is YED Negative Or Positive?

Answer 24

Both.

Question 25

What Is A Normal Good?

Answer 25

When demand for a product increases when incomes increase.

Question 26

What Type Of YED Do Normal Goods Have?

Answer 26

Positive YED.

Question 27

What Is A Inferior Good?

Answer 27

When demand for a product decreases when incomes increase.

Question 28

What Type Of YED Do Inferior Goods Have?

Answer 28

Negative YED.

Question 29

What Is The Formula For YED?

Answer 29

% ∆ In Qd / % ∆ In Income.

Question 30

What Is YED Determined By?

Answer 30

~ Whether the good is a luxury or necessity.

~ The level of income for a consumer.

~ Standards of living.

Question 31

When Is YED Price Inelastic?

Answer 31

Between the values of -1 and 1.

Question 32

When Is YED Price Elastic?

Answer 32

When less than -1 and more than 1.