A2.02.02: PED

Question 1

Define elasticity

Answer 1

A measure of responsiveness

Question 2

Define PED

Answer 2

The measure of the responsiveness of quantity demanded to a change in price

Question 3

PED = 0?

Answer 3

PED is perfectly inelastic no effect in price change on demand

Question 4

PED = 1?

Answer 4

• PED is unitary elastic
• Price change is proportionate to the quantity demanded
• When the product is unitary elastic, revenue doesn’t change as revenue rectangles area is the same

Question 5

PED = infinity?

Answer 5

• PED is perfectly elastic
• if prices are raised above P1, demand falls to 0

Question 6

Formula for PED?

Answer 6

% change in quantity demanded of the product / % change in price of the product

Question 7

PED > 1?

Answer 7

• The percentage change in quantity demanded is relatively more responsive following a percentage change in price
• When the product is elastic, in order to increase revenue, price should NOT BE INCREASED

Question 8

PED < 1?

Answer 8

• The percentage change in quantity demanded is not as responsive following a percentage change in price
• When the product is inelastic, in order to increase revenue, price SHOULD BE INCREASED.