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Economics > Elasticities Of Demand (PED) 4.1.3.2 > Flashcards

Elasticities Of Demand (PED) 4.1.3.2 Flashcards

1
Q

What is Price Elasticity of Demand (PED)?

A

Measures responsiveness of quantity demanded to a change in price

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2
Q

State the formula for PED

A

% Change in Quantity Demanded/ %Change in Price

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3
Q

How do you work out Percentage Change

A

(new - original/original)x100

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4
Q

Is PED positive or negative

A

NEGATIVE

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5
Q

Why is PED negative

A

The Law Of Demand

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6
Q

State the Law of demand

A

If price goes up (which is positive) the quantity demanded will fall ( which is negative)

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7
Q

What does a PED of 0 mean

A

Demand is Perfectly Inelastic

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8
Q

What does Perfectly Inelastic Demand mean

A

Demand does not vary with a change in price , implying consumers are WILLING and ABLE to pay any price for a product

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9
Q

How would you describe Perfectly Inelastic Denman

A

An extreme case

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10
Q

What does a PED of <1 indicated

A

Inelastic Demand

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11
Q

What does Inelastic Demand mean

A

The %change in demand is smaller than the % change in price

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12
Q

What does a PED of >1 indicated

A

Elastic Demand

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13
Q

What does Elastic Demand mean

A

demand responds more than proportionatley to a change in price

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14
Q

What does a PED of 1 indicate

A

Unitary Elasticity

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15
Q

What does Unitary Elasticity mean

A

the % change in demand is equal to the %change in price

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16
Q

State factors determining PED

A 
#close subsiutues/substitues
% of income spent on product
cost of substitutuing between different products
Brand loyalty/ habitual consumption
Type of good/degree of neccesity/luxury
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17
Q

Explain how the # of close substitutes can affect PED

A

more close substitutes there are the more price elastic the product is as consumers find it easier to switch if the price of one goes up

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18
Q

Explain how the percentage of TOTAL income spent on a product can affect PED

A

products that take up a higher percentage of income more elasic as any given price change is significant to the consumer

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19
Q

Explain how the cost of substitutuing between different products can affect PED

A

when the cost of substituting is higher producsts more price inelastic

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20
Q

Explain how Brnad Loyalty / Habitual Consumption / Type of Good can affect PED

A

HAB CONS- consumers less sensistitve to price as buy out of habit , it effectivley becomes their default choice (contextual , eg perfume)

TYPE OF GOOD - nature of good affects elasticity , addictive goods more inelastic as change in price unlikely to affect QD SIGNIFICANTLY as users feel they NEED product e.g cigs

BRAND LOYALTY - high levels make product more inelastic as a loyal consumer likely to consider price a less critical factor in a buying decision
- persuasive advertising can make demand price inelastic

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21
Q

Explain how the degree of necessity/luxury can affect PED

A

Standard assumption - necessities more inelastic as need them for survival so people more likely prepared to pay anything (e.g energy for warmnth)

luxuries are not needed and are an optional spend not priority so elastic

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22
Q

Why should degree of a nexessity /luxury be treated with caution

A

it comes down to subs available for example a luxury product may not have many obvious sub so inelastic whereas as basic staplefoods have many subs so quite elastic

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23
Q

What does a PED of infinity mean

A

Perfectly Elastic

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24
Q

What does Perfectly Elastic mean

A

only one price consumers prepared to pay, if you change the price demand drops to zero

change in market supply won’t lead to change in the equilibrium price

25
Q

The perfelcty elastic demand curve only applies to

A

highly competitive markets where no supplier has any pricing power

26
Q

What does unitary elasticity mean for total spending

A

the total spending by consumers on product will remain the same @ each price level

27
Q

on the graph how do we know the Total spending stays the same at each price level

A

area of underneath the demand curve is equal

28
Q

How does a firm maximise TR if price elasticity is elastic/>1

A

reduce the price as there will be a greater quantity demanded of the product

29
Q

How does a firm amximise TR if price elasticity is inelastic/<1

A

increase the price as quantity demanded wont drop significantly , likley to sell same number of product at a higher price

30
Q

How does a firm maximise TR if price elasticity is unitary elastic

A

change in price is met with a proportionate change in demand so for moderate price chanfes the revenue won’t change

31
Q

How do you put maximising of TR for unitary price elasticity in a simpler way

A

If PED =1 TR stays the same when there’s a price change

32
Q

For a straight lined demand curve what does PED do

A

Vary along the curve

33
Q

For a straight lined demand curve explain what can happen at high prices

A

Reduction in price will have an elastic response : lower prices causes TR to rise

34
Q

For a straight lined demand curve where is demand price inelastic

A

Towards the bottom of the demand curve - a fall in price causes TR to frop

35
Q

For inelastic products they usually have few….

A

close substitutes

36
Q

If a fall in market price causes total spending to rise the PED is

A

more than 1 /elastic

37
Q

For a straight lined demand curve a fall in price causes total spending to fall so PED

A

is less than 1 /inelastic and TR must have went down

38
Q

If TR falls when you cut price demand is

A

Inelastic

39
Q

PED is useful to BS they can use it to predict

A
  • Effect of a change in price on TR
  • Price volatility in a market following changes in supply} important for comodity producers who suffer big price and rev shifts from one time period ot another
  • Effect of a change in indirect tax on price and quantity demanded and if business can pass on some/all of tax onto consumer
40
Q

What type of BS uses/want to know PED and what for

A

-savient smart
so they can change prices to their advantage - max profit , keep bs afloat , pass on saving to consumers to be more competitive , invest profit back into bs

41
Q

What else can PED be used for by Businesses

A

Price Discrimination

42
Q

What is price discrimination and why do BS use it

A
  • suppliers / bs charges diff prices for same product to different segmnets of market
  • different consumers will have different PED for the same product
43
Q

Example of price discrimiation

A

off peak and peak rail fares

44
Q

In price discrimination who do businesses charge a higher price to

A

consumers whose demadn is price inelastic

45
Q

What price do businesses charge to customers who are more price sensitive

A

lower competitve pricen

46
Q

What is surge/dynamic pricing uber as exmaple

A

average price goes up @ peak times to take advantag e of low elasticity of demand.

47
Q

What are the limitations of Elasticity

A
  • Problems with innacurate/incomplete data collection
  • PED varies for a given product by region/ time period
  • Elasticity varies within product ranges
48
Q

Limitations of Elasticity - - Problems with innacurate/incomplete data collection explanation

A

therefore we talk about estimated PED rather than fully known confirmed figures

49
Q

Limitations of Elasticity-PED varies for a given product by region/ time period

A

There’s a variation of elasticity so no single uniform co-efficient for particular product

50
Q

Limitations of Elasticity- - Elasticity varies within product ranges

A

premium products may have a more inelastic demand due to their perception but economy product may be tailored as a price sensitive product as consumers susceptible to a good deal at a supermarket

51
Q

Factors that influence elasticity - Time Period

A

PED more elastic in long run as consumers able to adapt their purchasing habits and find other substitutes - over time new technology and producst may come out that make better susbtitutes

52
Q

Other applications of PED

A

Tax Revenue

Manufactured Goods v Primary commodities

53
Q

Other applications of PED - Tax revenue

A

gov can increase tax revenue by imposing it on inelastic goods . part of reason why cigs , petrol and alcohol highly taxed

54
Q

What type of PED do manufactured goods have

A

High

55
Q

Why do manufactured goods have a high PED

A

not neccesities and have many close substitutess

56
Q

Examples of manufactured goods

A

Socks , toys , furniture

57
Q

What type of PED do primary commodities have

A

Low

58
Q

Why is PED primary commodities low

A

usually neccesities with no close subs

59
Q

E.G of Primary commodities

A

wheat , cow leather , coal ,raw cane sugar

Economics (13 decks)

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