Chapter 7- Price Elasticity of Demand

Question 1

Elasticity of demand

Answer 1

looks at the impact of a change in price of a good, on the quantity demanded for that good. It can be measured by using the formula = Extend to which demand changes, as a result of a change in price.

A minority of goods has a price inelastic demand – this means that demand will remain fairly constant despite rapid changes in price – for example the price of petrol could fall 40% and yet demand may only increase by 20% - this is because the good is price inelastic

In the context of a price elastic product – demand will increase or decrease drastically depend on small change in price – most goods have a price elastic demand

Equation: % change in quantity demanded/% change in price

Question 2

whether it is price elastic or price inelastic

Answer 2

1. Elastic PED= >1 (greater than 1 it is price elastic)

2. Inelastic PED= <1 (less than 1, price inelastic)

Question 3

Factors influencing price elasticity of demand:

Answer 3

• Time- In the long term PED is likely to be elastic because
consumers and businesses are able to find substitutes e.g. if
the price of oil went up then in the short term consumers would
have to continue to buy petrol or diesel but in the longer term
they would seek alternative fuels.

• Competition- Some industries are highly competitive with many
different substitutes which will result in a high PED, e.g. farmers
who produce the same type of product.

• Branding- Some products have a strong brand image and a
high customer brand loyalty which will lead to a reduction in
PED, e.g. customers will tend to buy Coco Cola in preference to
other brands.

• Income- For cheap products an increase in price is unlikely to
have much effect on the demand for most products where it
represents a small proportion of a consumer’s income and
expenditure e.g. increase price of box of matches, small PED. In
contrast to expensive items like a car where an increase in
price would impact demand significantly.

• Product type- The demand for petrol and diesel is price
inelastic, certainly in the short term. However, the PED for
different brands of petrol is likely to be elastic because of the
number of substitutes available to the consumer