7-Price Elasticity of Demand (PED)

Question 1

What does Price elasticity of Demand (PED) do?

Answer 1

Measures the responsiveness of quantity demanded to a change in price

Question 2

Formula for PED

Answer 2

%ΔQD / %ΔP

Question 3

PED > ±1

Answer 3

PRICE ELASTIC DEMAND
Quantity demand responds more than proportionately to a price Δ

Question 4

PED < ±1

Answer 4

PRICE INELASTIC DEMAND
Quantity demand responds less than proportionately to a price Δ

Question 5

PED = 1

Answer 5

UNIT ELASTIC DEMAND
Quantity demand responds proportionately to a price Δ

Question 6

PED = 0

Answer 6

PERFECTLY INELASTIC DEMAN
Quantity demand does not respond to a price Δ

Question 7

PED = ∞

Answer 7

PERFECTLY ELASTIC DEMAND
Demand is completely sensitive to price, any increase in price will cause demand fall to zero. Eg- perfect substitute

Question 8

Factors that influences PED

Answer 8

—> Availability of Substitutes
—> Luxury and Necessity Goods
—> Proportion of Income Spent on the Goods (% of Income)
—> Addictive and Habit Forming Goods
—> Branding
—> Durability of a Product
—> Time Period

Question 9

Factors that influences PED
—> Availability of Substitutes

Answer 9

Good with lots of substitute will have PRICE ELASTIC DEMAND, because consumers can easily switch due to a Price Change

Question 10

Factors that influences PED
—> Luxury and Necessity Goods

Answer 10

Luxury Goods (sports car) tend to have PRICE ELASTIC DEMAND
Necessity Goods (bread) tend to have PRICE INELASTIC DEMAND

Question 11

Factors that influences PED
—> Proportion of Income Spent on the Goods (% of Income)

Answer 11

If a good takes larger proportion of income (television) then Demand will be PRICE ELASTIC DEMAND.
If it takes small proportion of income (bread) then Demand will be PRICE INELASTIC DEMAND

Question 12

Factors that influences PED
—> Addictive and Habit Forming Goods

Answer 12

If a good is Habitual in Consumption (coffee) or addictive in nature then Demand will be PRICE INELASTIC DEMAND

Question 13

Factors that influences PED
—> Branding

Answer 13

Goods with Strong brand image (coca cola) will have PRICE INELASTIC DEMAND because consumer will pay premium price

Question 14

Factors that influences PED
—> Durability of a Product

Answer 14

Goods that are long lasting and whole purchase can be postponed by consumers will have PRICE ELASTIC DEMAND (cars).
Goods that are non durable (vegetable and petrol) will have PRICE INELASTIC DEMAND because these must be replaced regularly

Question 15

Factors that influences PED
—> Time Period

Answer 15

Demand for a product is PRICE INELASTIC in the short run and PRICE ELASTIC in the long run.
Because it takes time for consumers to adjust their spending pattern and switch to alternatives to a price Δ