Economics theme 2.2,1 Flashcards
what is price elasticity of demand
price elasticity of demand is amesure of how responsive demand is to change in price
What is the relationship between price and demand
as price goes up demand goes down
As price goes down demand goes up
What does price elastic mean
Price elastic demand means that a change in price leads to a more than proportional demand change i.e demand is sensitive to price change
What does price inelastic mean
Price inelastic to demand means change in price will lead to a less proportional change im demand
What is the PED for niche markets
With nieche markets the firms usually target a market where they are looking for higher quality
So demand isnt as responsive to change
Therefore inelastic
So have higher prices and higher added value but overall demand will be less
What is PED of mass markets
In mass markets customers view the price as importaint
Meaning they are less likely to buy with higher price points due to their being lots of competition
Therefore price elastic
So charge lower prices with lower added value but have a higher demand
How do we work out price elasticity
change in value/ origional value x 100
%change in quantity demanded/% change in price
if Ped coefficient is 0 what does this mean
Perfectly inelastic
buisness can change price to as high as they want and demand will stay the same
if Ped coefficient is 0<-1 what does this mean
price inelastic
A firm should raise price demand will decrease but total rev will increase
if Ped coefficient is -1 what does this mean
Unitary (constant) elastic
increasing or decreasing their price will have no effect on total revenue
if Ped coefficient is -1 what does this mean
price elastic
Firm should lower price demand will increase but total rev will increase
what are the steps to calculate ped
Step 1 Change in Demand x 100 -20 x 100 = - 10%
Original Demand 200
Step 2 Change in Price x 100 10 x 100 = 20%
Original Price 50
Step 3 % change in Qd -10 = - 0.5
% change in P 20
What determines price elasticity
substitutes
time
definition of the market
How do substitues effect the elasticity
Substitiutes effect them depending on the number of sustitiutes available
If there are no close substitutes th product will become price inelastic
How does time effect price elasticity
In the short run products are likely to be price inelastic as customers find it difficult to change their shopping habits
In the long run products are more likely to be price elastic as consumers adjust to the changing market
