3.1 Price Elasticity of Demand

Question 1

Definition of Price Elasticity of Demand

Answer 1

Price elasticity of demand measures the degree
of responsiveness of quantity demanded to a
change in the price of the good itself, ceteris
paribus.

Question 2

What is it called when the PED of a good is -1

Answer 2

Unitary good

Question 3

What factors affect the price elasticity of demand?

Answer 3

1. Number and closeness of substitutes
2. Necessities vs Luxury
3. Length of Time
4. Proportion of income spent on the good
5. Addiction (Habit)

Question 4

Definition of total revenue

Answer 4

Total amount received from the sale of product.

Question 5

What is the role of PED for a firm that is producing a good that is price inelastic.

Answer 5

1. reduce output
2. increase price
3. since consumers are unresponsive to the higher prices.
4. total revenue increases

Question 6

What is the role of PED for a firms that is producing a good that is price elastic.

Answer 6

1. increase output
2. decrease price
3. since consumers are sensitive to the lower prices, the percentage quantity sold will exceed the percentage decrease in price.
4. this increases the total revenue

Question 7

Limitations of PED

Answer 7

1. difficult to obtain data on PED / PED changes over time.
2. may not have enough resources to produce more goods.
3. TR may not increase even when price is decreased if non-price factors change.