Chapter 2- Market Analysis Flashcards
What is the impact of changing price/income?
Consumers may change their spending habits
What is price elasticity of demand (PED)?
Measures the responsiveness of demand to a change in price
What is the formula for PED?
% change in quantity demanded/ % change in price
How to do percentage change?
new - original/ original X 100
What is it when the price is elastic?
A change in price will cause a MORE than proportional change in the quantity demanded; the level of demand is sensitive to a change in price
The value is MORE than one!
What happens to price and demand when the price is elastic?
If price goes UP, demand will go DOWN DRASTICALLY
If price goes DOWN, demand will go UP DRASTICALLY
What is it when the price is inelastic?
This is what a business wants; a change in price will cause a LESS than proportional change in the quantity demanded; the level of demand is not sensitive to a change in price
The value is LESS than one!
What happens to price and demand when the price is inelastic?
If price goes UP, demand will go DOWN SLIGHTLY
If a price goes DOWN, demand will go UP SLIGHTLY
What is it when the price is unitary elastic?
This means that a change in price will cause an EQUAL and proportional change in the quantity demanded
The value is EQUAL to one!
What type of products are likely to be price elastic?
Luxury products (such as, sports cars, exotic holidays etc)
In a market with undifferentiated products usually
What type of products are likely to be price inelastic?
More likely to be products that are a necessity
(such as, water, power, petrol and addictive goods)
If they become more expensive, people will still demand them
What is income elasticity of demand (YED)?
Measures the responsiveness of demand to a change in income
What is the formula for YED?
% change in quantity demanded/ % chan3yge in income
What is it when income is elastic?
This means that a change in income causes a more than proportional change in quantity demanded; a luxury good
The value is MORE than one (positive and high)
What is it when income is inelastic?
This means a change in income causes a less than proportional change in quantity demanded; a normal good
The value is between zero and one (positive and low)
What is it when income is negatively elastic?
This means if income rises then demand falls and vice versa; an inferior good
The value is less than zero (a negative number)
How does price elasticity impact revenue?
If demand is price elastic and prices are lowered then revenue for each item sold falls; but the quantity sold increases more than proportionately which means that total revenue will increase
How does price inelasticity impact revenue?
If demand is price inelastic and a price rise will lead to a rise in sales revenue, likewise a fall in price will lead to a fall in sales revenue
