Elasticity - Sensitive Of Demand And Supple Flashcards
PED formula
PED = %QD/%P
Define elasticity
Elasticity is a messier of the sensititivy/responsiveness of one variable to changes in another variable.
Why is a knowledge of price elasticity so important to firms?
A rims total revenue is calculate by multiplying the price received for the product by the quantity demanded for the product.
-when the price of their product falls quantity demanded will rise and when the prices rises quantity demanded will fall; however I is the extent of the rise or fall given change in price that determines whether total revenue rises or falls.
When demand is relatively price inelastic…
An increase in price leads to a rise in total revenue, a fall in price leads to a fall in total revenue.
When demand is relatively price elastic
Rise in price leads to a fall in revenue, a fall in price leads to an increase in revenue.
PED>1
If PED>1 demand is relatively price elastic. Therefore, an increase in price leads to a decrease in business revenue.
PED
If PED
PED>1
Is relatively price elastic. Therefore, there is a decrease in price leads to an increase in business revenue.
PED
Demand relatively price inelastic. Therefore, a decrease and a decrease in business revenue.
Perfectly elastic
Infinity
% change in Qd is Infinite.
Relatively elastic
Greater than -1
% change in Qd is equal to the % change in price.
Unit elasticity
-1
% change in Qd is equal to the % change in price.
Relatively inelastic
Less than -1
% change in Qd is less than the % change in price.
Perfectly inelastic
0
No change in Qd when price changes
Steeper gradient
Relatively inelastic
