elasticity Flashcards
When is a product price inelastic? normal one
When it has few substitutes and the quantity demanded of the product is very insensitive to changes in price.
When is a product price inelastic?
When there are other firms that can offer a much cheaper price for the same product and the quantity demanded of that product is very sensitive to changes in price.
What would be the result of an increase in the price of a price elastic product?
It would lead to a more than proportionate fall in the quantity demanded.
What does price elasticity of demand measure?
The responsiveness of quantity demanded to a change in price.
What is the formula for price elasticity of demand?
% change in quantity demanded/ % change in price
Why are results negative for PED?
Demand curves slope downwards therefore we expect to see that as price rises, the quantity demanded falls.
What are the ranges for PED?
0 = perfectly price inelastic, 1 = price elastic and infinity is perfectly price elastic.
What is the shape of a perfectly price inelastic demand curve and why is this the case?
A vertical line as no matter how much price rises or falls, the same quantity is always sold. The quantity demanded is completely insensitive to changes in price.
What is the shape of a perfectly price elastic demand curve and why is this the case?
A horizontal line as this shows the firm can sell as much as it wishes at a given price. However, a rise in price leads to demand falling to zero.
What is the result of an increase in price of a product that is price inelastic?
There will be a less than proportionate fall in the quantity demanded.
What is the definition of total revenue?
A firm’s total earnings from a given quantity of sales.
How will a price increase impact revenue?
Revenue too will increase providing that the product is price inelastic.
What is total revenue equal to?
Price x quantity
How is revenue illustrated on the demand curve?
It is shown by the area underneath the demand curve.
When does ‘maximisation of total revenue occur’?
When the PED is -1.
What are the factors affecting PED called?
Determinants of PED.