Demand Elasticities Recap

Question 1

PED

Answer 1

Price elasticity of demand is how responsive demand is to a change in price. % change in a quantity demanded/% change in price. Very rare in reality

Question 2

Perfect elasticity

Answer 2

Quantity demanded experiences an infinitely large change if price changes (to infinitely high or 0). No price change is possible

Question 3

Elastic

Answer 3

Quantity demanded falls by a higher % than the % price rise e.g. PED=(-)1.2

Question 4

Unit elasticity

Answer 4

Quantity demanded falls by the same % than the % price rise e.g. PED=(-)1

Question 5

Inelastic

Answer 5

Quantity demanded falls by a lower % than the % price rise e.g. PED=(-)0.4

Question 6

Perfect inelasticity

Answer 6

Quantity demanded doesnt rise or fall at all when price is changed due to having no subs e.g. insulin.

Question 7

Factors determining PED

Answer 7

• Substitutability- More subs=More elastic
  -% of income- Large proportion of income=more elastic Rarely bought goods= inelastic
  -Necessities vs Luxury- Necessities=inelalstic Luxury=Elastic depending on substitutability

Question 8

Alternative rule for elastic/inelastic

Answer 8

If total consumer expenditure increases in response to a price fall, demand is elastic
If total consumer expenditure decreases in response to a price fall, demand is inelastic
If total consumer expenditure remains constant in response to a price fall, demand has unit elasticity

Question 9

Elasticity, price and revenue

Answer 9

-Perfectly elastic- Change in price=revenue drops to 0
-Elastic- Change in price=Inverse change in revenue
-Unit elastic- Change in price=Revenue remains the same
-Inelastic- Change in price= Direct change in revenue
-Perfect inelasticity- Change in price=Direct change in revenue
Inverse= Higher price=Lower revenue
Direct= Higher price=Higher revenue