4. Price elasticity

Question 1

What is price elasticity of demand and how is it calculated?

Answer 1

The likely responsiveness of demand to a change in price?

PED = %change in quantity demanded / % change in price

Question 2

What is elastic demand?

Answer 2

If the price elasticity of demand is greater than 1 this means that the percentage change of demand is greater than the percentage change in price. Demand is said to be price elastic. ie responsive to price change.

Question 3

What is inelastic demand?

Answer 3

If the PED is less than 1 this means that the percentage change in demand is less than the percentage change in price. Demand is said to be unresponsive to price changes.

Question 4

What are the determinants that increase price elasticity of demand?

Answer 4

• If there are many substitute products available
• Brand loyalty is weak
• The product is luxury
• A high proportion of income is spent on the product
• The time period since the price changed is longer

Question 5

What is price elasticity of supply and how is it calculated?

Answer 5

It is a measure of the responsiveness of the quantity supplied to the change in price.

% change in quantity supplied / % change in price

Reflects the ability of firms to increase output when demand rises