3.3.2 Understanding markets and customers (part 2).

Question 1

Define price elasticity of demand.

Answer 1

The degree to which the quantity demanded of a good or service is affected by change in price.

Question 2

Define income elasticity of demand.

Answer 2

The degree to which the quantity demanded of a good or service is affected by a change in consumer income.

Question 3

How do you calculate price elasticity of demand?

Answer 3

% Change in quantity demanded.
__________________
% Change in price.

Question 4

How do you calculate income elasticity of demand?

Answer 4

% Change in quantity demanded.
_________________
% Change in income.

Question 5

Define Elastic demand.

Answer 5

If the change in price leads to a greater percentage change in the quantity demanded than the percentage change in price.

Question 6

Define Inelastic demand.

Answer 6

If the change in price leads to a small percentage change in the quantity demanded than the percentage change in price, the calculation will equal 1 (ignoring the minus sight).

Question 7

What does it mean when price elasticity is 0?

Answer 7

There is no change in quantity demanded when price change. This is known as perfectly inelastic demand. If price increases by 10% then sales revenue will increase by 10%.

Question 8

What is Unit (or unitary) elasticity?

Answer 8

The name given to a situation where both percentage changes are the same, giving an answer of (-)1. In theory, the price change is exactly cancelled out by the change in quantity demanded, so sales revenue stays the same.

Question 9

Outline what inelastic demand means.

Answer 9

If demand for a good is inelastic - when its price rises the quantity demanded falls by a small percentage. This means that the impact of the price increase will outweigh the relatively small percentage change in demand, so sales revenue will increase.

Question 10

Outline what elastic demand means.

Answer 10

If demand for a good is elastic, when its price rises the quantity demanded falls by a larger percentage. This means that the impact of the price increase will be outweighed by the relatively large percentage change in demand, so sales revenue will decrease.

Question 11

Outline what it means when demand has unitary elasticity.

Answer 11

Sales revenue will be the same whether price rises or falls. A price rise would then be advisable if a business is aiming to increase profit, because this means a lower volume of sales would be required, which would enable production costs to fall.

Question 12

What factors influence the price elasticity of demand.

Answer 12

Necessity.
Habit.
Availability of substitutes. 
Brand loyalty.
Proportion of income spent on product.
Consumer income.
Time.

Question 13

How does income elasticity effect luxury products?

Answer 13

Income elasticity of demand will be greater than 1.

Question 14

How does income elasticity effect necessities?

Answer 14

Likely to be a rise in demand than is smaller than the rise in income. This will give an elasticity that greater than 0.

Question 15

How do you calculate % change in quantity demanded?

Answer 15

Change in quantity demanded.
_______________________
original quantity demanded.

Question 16

What are the difficulties in calculating (and using) elasticity of demand?

Answer 16

There may have been significant changes in the market, affecting the level of demand independently of price or income. For example:
- Consumer tastes may have changed.
- New competitors may have 
  entered the market or 
  previous competitors may 
  have left.
- Technological change may 
  have influenced the 
  market.
- The image of the product 
   may have changed.

Question 17

Why might change in price be a problem to PED?

Answer 17

May provoke a reaction from firms who then may try to match the change or modify their marketing in response to the change. This reaction may not always be the same.

Question 18

Why might consumer reaction be a PED disadvantage?

Answer 18

May react differently to increases in price or income than decreases. For example a decrease in price might not encourage consumers to buy more, but an increase may tempt them to buy from competitors.

Question 19

Why might consumer spending be a PED disadvantage?

Answer 19

Consumers may be unable to predict how their spending will be affected by price or income changes, and so primary survey may be unreliable.

Question 20

If price elasticity of demand is below 0, then what does that mean?

Answer 20

That the product is an inferior good, any changes made to pricing or demand will not make a difference.

Question 21

If price elasticity of demand is greater than 0 but less than 1, then what does that mean?

Answer 21

That it is income inelastic.

Question 22

If price elasticity of demand is above 1, then what does that mean?

Answer 22

That it is income elastic.