Economics - 1.2.6a - Price Elasticity of Demand Flashcards

1
Q

What is the formula for PED

A

% change in quantity demanded / % change in price

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2
Q

what is the formula for % change in price

A

new price - old price / old price X 100

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3
Q

what are the steps in answering a PED question

A

1) find the % change in price
2) divide the % change in price by % change in demand
3) round up the result to 3 significant figures

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4
Q

what are the values of PED

A

equal to 1 = price unitary demand
equal to 0 = perfectly inelastic demand
equal to infinity = perfectly elastic demand

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5
Q

What are the values for elastic and inelastic

A

price elastic = value more than 1

price inelastic = value between 0 and 1

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6
Q

what is inelastic demand

A

goods where prices change but demand stays the same as there are a few substitutes

results between 0 and 1 are inelastic

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7
Q

how does the availability of substitutes influence the level of PED?

A

demand is sensitive to price with the more substitutes there are

lots of substitutes makes demand sensitive to price and the product is price elastic

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8
Q

how does necessity goods influence the level of PED

A

lower price elasticities as consumers must purchase the product despite price changes

Eg petrol is a necessity so people still purchase it even if the price increases making the price very inelastic

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9
Q

How do luxury goods influence the level of PED

A

very expensive and take up a large % of consumers incomes so they are very cautious of a price increase

luxury goods are a large investment for consumers who pay attention to the price making the price elastic

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10
Q

how does the expense of a product influence the level of PED

A

expensive products are elastic as consumers are careful with the price

inexpensive products are inelastic as they have small price increases and so consumers are insensitive to price changes

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11
Q

what is the significance of PED for firms

A

firms can plan what happens to sales and sale revenue if prices rise or fall

firms can use price discrimination with students on certain products due to their price sensitivity

if firms are in a price inelastic market they should try and compete using other methods

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12
Q

what is the significance of PED for governments

A

important to the gov for taxation to impose sales taxes or value added taxes to raise the prices of goods and services

the PED of these goods helps to assume the impact of the tax on the good

Eg sales taxes are put on inelastic hotels so that hotels dont lose business and the tax revenue falls

govs dont raise sales taxes on elastic items

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13
Q

why isnt PED the same the whole way along the demand curve

A

if prices are high, a change of 1p is a very small price change and the increase from quantity 1 to 2 is large

if prices are low, a change of 1p is a large price change and quantity demanded from 100 to 101 is a small change

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14
Q

how are PED and total revenue linked?

A

if demand is elastic and the price falls, quantity demanded rises more than proportional so total revenue increases

if demand is inelastic and price falls, quantity demanded rises less than proportional so total revenue decreases

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