Eco 0.1 Flashcards
Define Price Elasticity of Demand
Price elasticity of demand measures the responsiveness of quantity demanded of a good or service to changes in its price.
Explain the meaning of the statement, “In this price range, good A has elastic price elasticity of
demand.”
A given change in price causes a more than proportionate change in quantity demanded.
PED is Elastic (when price increases) Because:
When price increases, total revenue (TR) decreases. Since TR is calculated as TR = P × Q, a price increase leads to a more than proportionate drop in quantity demanded, causing TR to fall.
PED = 0
Perfectly Inelastic
0<PED<1
Inelastic
PED = 1
Unitary Elastic
PED > 1
Elastic
PED = Infinite
Infinitely Elastic
Explain the meaning of the statement, “In this price range, good A has inelastic price elasticity of
demand.”
A given change in price causes a less than proportionate change in quantity demanded.
PED is Elastic (when price decreases) Because:
When price decreases, total revenue (TR) increases. Since TR is calculated as TR = P × Q, a price decrease leads to a more than proportionate increase in quantity demanded, causing TR to increase.
PED is Inelastic (price increases) because:
When price increases, total revenue (TR) increases. Since TR is calculated as TR = P x Q, a price increase leads to a less than proportionate drop in quantity demanded , causing TR to increase.
Advice for the Supermarket
- To increase TR, the supermarket should raise prices for goods with Inelastic PED, and consider lowing prices for goods with Elastic PED.
- The manager should collect data on PED coefficients for all the goods sold in the supermarket.
Percentage Change Method
PED = %^QD / %^P
%^QD = (Change after - change before / change before) x 100
%^P = (Change after - change before / change before) x 100
Midpoint Method
PED = (%^QD / %^P) x (P1 + P2 / Q1 + Q2)
%^QD = Change before - Change after
%^P = Change before - change after
