AS2 TP5 Flashcards
what does price elasticity of demand measure
measures the responsiveness of the quality demanded to change in its price
how is PED calculated
% change in quality demanded
/
% change in price
how is % change in demand calculated
change in demand / original demand x100
how is % change in price calculated
change in price / original price x100
what does it mean if its more than 1.0
its elastic
what does it mean if its less than 1.0
its inelastic
describe what is meant by elastic demand
describe what is meant by elastic demand
if the demand for a product is elastic even a small change in price will lead to a large % change in quantity demanded, when calculated will be greater than 1.0
elastic demand means that quantity demanded is sensitive to price change
describe what is meant by inelastic demand
if demand for a product is inelastic it will take a large % change in price to cause a small % change in demand
when calculated it will be greater than 0 but less than 1
not sensitive to price change
what happens revenue when a price cut occurs on a price elastic product
will boost revenue (extra demand for product)
what happens revenue when a price increase occurs on a price inelastic product
will boost revenue (due to only a small demand originally)
what happens revenue when PED is inelastic and price increases
revenue increases
what happens revenue when PED is inelastic and price decreases
revenue decreases
what happens revenue when PED is elastic and price increases
revenue decreases
what happens revenue when PED Is elastic and price decreases
revenue increases
what factors affect price elasticity of demand
number of close substitutes - how easy customers can switch to another product
cost of switching between products - if there are costs involved in switching to another product
whether product is a luxury or necessity - necessities tend to be more inelastic whereas luxury products tend to be more elastic
