Chapter 11-Price Elasticity of Demand

Question 1

Price Elasticity of Demand

Answer 1

Price elasticity of demand is a measure of the responsiveness of the quantity demanded to a change in price.

Question 2

Formula of PED (Price Elasticity of Demand)

Answer 2

PED= Percentage change in quantity demanded/ percentage change in price

Question 3

Calculate percentage change in quantity demanded and percentage change in price

Answer 3

Percentage change in quantity demanded: change in demand/ original quantity demanded X 100
Percentage change in price: change in price/ original X 100

Note: PED is always a negative number

Question 4

interpretation of PED

Answer 4

A minus sign shows that there is an inverse relationship between quantity demanded and price, RISE in price leads to a contraction in demand, FALL in price leads to an extension in demand. The size of the figure indicates the extent by which demand will extend or contract when price changes.

Question 5

Elastic and inelastic Demand

Answer 5

most products have either elastic or inelastic demand. when demand is elastic, price and total revenue move in opposite directions. In the case of elastic demand a firm can increase its total revenue by lowering its price, but it must be aware that their total revenue will fall if their price is raised. Elastic demand is usually shown on a shallow demand curve.

In inelastic demand price and revenue will move in the same direction. If the price is raised, the quantity demanded will fall, but by a smaller percentage than the change in price and hence more revenue will be earned. if the price is lowered, the number of products demanded will increase but not enough to make up for the fall in price, hence the total income will fall. Therefore, if a company wants to raise its revenue it should raise its price. Inelastic demand is usually represented by a relatively steep demand curve.

Question 6

Determinants of Price elasticity and demand

Answer 6

Avaliability of Substitutes of similar price and quantity:
more is elastic
less is inelastic

Proportion of Person’s Income Spent on the Product:
more elastic
less inelastic

Is the product a Luxury or Necessity:
Luxury elastic
Necessity inelastic

Whether Product is Addictive:
Yes inelastic
No elastic

Whether purchase of the product can be postponed:
Yes elastic
No inelastic

How narrowly Defined product is:
more elastic
less inelastic

Question 7

Elastic Demand

Answer 7

elastic demand is when the quantity demanded changes by a greater percentage than the change in price

Question 8

Inelastic Demand

Answer 8

inelastic demand is when the quantity demanded changes by a smaller percentage than the change in price

Question 9

Perfectly Elastic Demand

Answer 9

Perfectly elastic demand is when a change in price causes a complete change in the quantity demanded. A rise in price would cause demand to fall to zero

Question 10

Perfectly Inelastic Demand

Answer 10

Perfectly inelastic demand is when a change in price has no effect on the quantity demanded. Perfectly inelastic demand would not only cause price and demand to move in the same direction, but also by the same percentage

Question 11

Unit Elasticity of Demand

Answer 11

Unit elasticity of demand is when a change in price causes an equal change in the quantity demanded, leaving the total revenue unchanged.