3.1 - Elasticities - Price elasticity of Demand

Question 1

Price elasticity of demand

Answer 1

A measure of the responsiveness of the quantity demanded of a good or service to changes in its price

Question 2

Price elastic demand

Answer 2

Quantity demanded is highly responsive

Question 3

Price elasitic demand

Answer 3

Quantity demanded is not very responsive

Question 4

Formula for PED

Answer 4

PED = percentage change is quantity demanded/ percentage change in price

Question 5

Sign of PED

Answer 5

Drop the minus sign and consider it a positive number. Done to avoid confusions when making comparisons.

Question 6

0<PED<1

Answer 6

Price inelastic demand where quantity demanded is relatively unresponsive to price. Steep downward sloping line.

Question 7

1<PED<∞

Answer 7

Price elastic demand where quantity demanded is relatively responsive to price. Shallow downward sloping line

Question 8

PED=1

Answer 8

Unit elastic demand where percentage change in quantity demanded equals percentage change in price. line is downward then curves and platoes.

Question 9

PED=0

Answer 9

Perfectly inelastic demand where quantity demanded is completely unresponsive to price. Vertical line

Question 10

PED = ∞

Answer 10

Perfectly elastic demand where quantity demanded is infinitely responsive to price. Horizontal line

Question 11

Changing PED and the straight line demand curve

Answer 11

As we move down the curve the PED varies. When price is low and quantity is high, demand is inelastic. As we move up the curve toward higher prices and lower quantities demand becomes more and more elastic.

Question 12

Why does PED vaey along a straight line curve.

Answer 12

PED is equal to a constant number(slope of a straight line) multiplied by P/Q. As we move down the demand curve, P gets smaller and smaller, while Q gets bigger and bigger , therefore P/Q become continuously smaller. This means that as we move down the demand curve, PED which is equal to a constant number times an ever decreasing number, must be getting smaller

Question 13

How does number and closeness of subsitutes affect price elasticity of demand.

Answer 13

The more substitutes a good has the more elastic is its demand.
With specific brands for example if the price increases there are available substitutes to switch to so the quantity demanded changes alot.

Question 14

Necessities

Answer 14

Goods and services we consider to be essential or necessary in our lives

Question 15

Luxuries

Answer 15

Not necessary or essential

Question 16

Necessities vs luxuries

Answer 16

The demand for necessities is less elastic than the demand for luxuries, people’s lives depend on them for example medication.

Question 17

Length of time

Answer 17

The longer the time period in which a consumer makes a purchasing decision, the more elastic the demand. As time goes by, consumers have the oppurtunity to consider whether they really want and to get information on the availability of alternatives to said good

Question 18

Proportion of income spend on good

Answer 18

The larger the proportion of one’s income needed to buy a good, the more elastic the demand

Question 19

Total revenue

Answer 19

The amount of money recieved by a firm when they sell a good or service.

Question 20

Demand is elastic, TR?

Answer 20

When demand is elastic, an increase in price causes a fall in total revenue, while a decrease in price causes a rise in total revenue.

Question 21

Demand is inelastic, TR?

Answer 21

When demand is inelastic, an increase in price causes an increase in total revenue, while a decrease in price causes a fall in total revenue.

Question 22

Demand is unit elastic, TR?

Answer 22

When demand is unit elastic, a change in price does not cause any change in total revenue.

Question 23

PED and firm pricing decisions

Answer 23

If a business wants to increase total revenue, it must drop the price if its demand is elastic, or increase its price if demand is inelastic

Question 24

PED and indirect taxes

Answer 24

The lower the price elasticity of demand for the taxed good, the greater the government tax revenues.