Elasticities of Demand Flashcards
Price elasticity of demand (PED)
(meaning and what it shows)
numerical value(no units)
Responsiveness of demand to a change in price
‘the way consumers react’
shows us if goods are elastic or inelastic
PED formula
PED= %change in Q.D/ %change in price
How to tell whether it is elastic or inelastic
(we ignore the negative sign in front, just look at the actual number)
If answer is >1: Demand is price elastic
If answer is =0: Demand is perfectly inelastic
If answer is <1: Demand is price inelastic
Price Elastic
meaning and what happens
Smaller Change in Price leads to bigger percentage change in QD
-usually goods with more substitutes (customers more likely to switch if price changes)
Perfectly Elastic
PED= infinity
any change in P means D will fall to zero
customers are willing to buy at certain P but nothing at a higher price
Inelastic
meaning and what may happen
Changes in P leads to smaller percentage change in QD
-usually have no close substitutes
Perfectly Inelastic
Any change to price means no change to quantity demanded
-consumers willing to buy at various prices
-No substitutes (medicines like insulin)
What is PED influenced by
Type of Good: essentials=inelastic, non essentials=elastic, addictive= inelastic
Substitutes: availability (more substitutes-more elastic)
% of income spent on good: expensive= more elastic
Relationship between price and revenue
Elastic= P and R (indirect)
Inelastic= P and R (direct)
Total Revenue=
price per unit x quantity sold
If demand is Elastic/inelastic then increasing price would…
Inelastic: increasing price will cause the quantity demanded will decrease but revenue would still increase
Elastic: firms are unlikely to increase price as this could lead to a fall in revenue
(instead firms use advertising and brand loyalty to make demand more inelastic)
