chp 11

Question 1

PED

Answer 1

Percentage change in quantity demanded /
Percentage change in price

Question 2

What does PED measure

Answer 2

PED measures the extent to which quantity demanded changes fallowing a price change - not the reverse. The negative sign is usually ignored.

Question 3

PED

Answer 3

Price elasticity
of demand
(PED):
a measure of the responsiveness of the quantity demanded to a change in price

Question 4

Elastic demand

Answer 4

Elastic demand: when the quantity demanded changes by a greater percentage than the change in price.

Question 5

Inelastic demand

Answer 5

Inelastic demand: when the quantity demanded changes by a smaller percentage than the change in price.

Question 6

In general

Answer 6

general:
• Elastic demand gives a PED figure of more than I but less than infinity - usually shown by a shallow demand curve.
• Inelastic demand gives a PED figure of less than I but greater than
0- usually shown by a steep demand curve.

Question 7

Factors that determine whether PED is elastic or inelastic

Answer 7

How the market is defined
Proportion of income spent on the product
Time period
Is it a necessity or a luxury?
Is the product addictive?
Can purchase be postponed?
Availability of substitutes

Question 8

Elastic demand rise in price

Answer 8

Decrease in spending and revenue

Question 9

Elastic demand fall in price

Answer 9

Increasing in spending and revenue

Question 10

Inelastic demand rise in price

Answer 10

Increase in spending and revenu

Question 11

Inelastic demand fall in price

Answer 11

Decrease in spending and revenue

Question 12

Refer to Figure II.I. Explain why the two demand curves show elastic and
inelastic demand.

Answer 12

The left-hand diagram shows an elastic demand curve. The relative change in quantity demanded is greater than the relative change in price.
The right-hand diagram shows an inelastic demand curve. The relative change in quantity demanded is less than the relative change in price.

Question 13

Suppose that PED for a designer watch is 3. If the price falls by 10%, what will be the change in the quantity demanded?

Answer 13

30%

Question 14

With reference to PED, are there any circumstances when a producer should not increase the price of a product?

Answer 14

3 A producer should not increase the price of a product when its PED is elastic as this will decrease the revenue received.

Question 15

Explain how a reduction in the price of a product with inelastic demand will
increase sales but reduce revenue.

Answer 15

When the price falls from P to P,, the quantity demanded increases from Q to Q,.At price P. the revenue from sales is OPAQ. At price P, the revenue from sales is OP, BQ, which is less than when price was at P.The loss of revenue, area X, is greater than the gain, area Y.

Question 16

Refer back to the table showing weekly demand for air travel between two cities in Pakistan (In the sample question and answer part of Chapter Il.I).
Explain how PED varies over a demand curve.

Answer 16

The values for PED change from elastic to inelastic with a movement down the demand curve. (The values for each change in price are 4, 4.7, 2.4, 0.72, 0.5 and 0.18.)

Question 17

3
It has been reported that the PED for gasoline in Mauritius is -0.21 in the short run and -0.44 in the long run. Explain why the figures differ.

Answer 17

Both estimates are inelastic, the short run figure being more inelastic than that for the long run. This indicates that in the short run, if, say, price increases, people in Mauritius will buy less gasoline but have little opportunity to switch to other forms of fuel.
There is more opportunity for them to do this in the long run when the alternatives become known to them.

Question 18

Discuss whether or not producers can use the PED of a product to determine whether they should change the price of their product.

Answer 18

• If PED is elastic, a fall in price will increase revenue. An increase in price reduces revenue.
• If PED is inelastic, an increase in price will increase revenue. A reduction in price will lead to a fall in revenue.
• The assumption is that price is the only factor that influences the quantity demanded. This is invariably not the case, as other factors have to be considered.

Question 19

How might the concept of price elasticity of demand be useful to the owner of a resort hotel in the Maldives?

Answer 19

To determine the effect on sales of reducing prices in low season

Question 20

The price of guided tour holidays to India increased by 10% in 2017 and the quantity demanded fell by 4%. Which is true?

Answer 20

The price elasticity of demand is 0.4 and inelastic

Question 21

Which characteristic is least likely to make the demand for a product inelastic?

Answer 21

It has close substitutes