Elastiscity (Definitions)- PED

Question 1

PED

Answer 1

Price elasticity of demand measure the responsiveness of the quantity demanded of a good in a change in price.

Question 2

Elastic goods

Answer 2

Δ in P causes a more than proportionate Δ in QD
Coefficient is: Greater than 1

Question 3

Inelastic goods

Answer 3

Δ in P causes a less than proportionate Δ in QD
Coefficient is: Less than 1

Question 4

Characteristics/ types of Elastic goods

Answer 4

Luxuries, have close substitutes, involve a high proportion of income, are easily postponed

Question 5

Characteristics/ types of Inelastic goods

Answer 5

Necessities, have few or no substitutes, take up only a small proportion of income and can not easily be postponed (they may also have a fifth characteristic, that they are addictive)

Question 6

Calculate PED

Answer 6

(Change in quantity demanded/ Midpoint of quantity demanded)
……………………………………………………….
(Change in price/ midpoint indicated)

Question 7

PANTS
(Only need to pick two relevant in explaination)

Answer 7

Proportion of income:
Small proportion
Large proportion

Addictiveness:
Addictive
Not addictive

Necessity or Luxury?:
Necessity
Luxury

Time period:
Short time period
Long time period

Substitutes:
Lots of close substitutes
Very few substitutes

Question 8

Calculate Total revenue
Why should a business know this?

Answer 8

TR= P X Q
A knowledge of PED can help business to foresee the impact of a price change on their total revenue.

Question 9

UNITARY/ UNIT ElASTIC DEMAND
(Business)

Answer 9

UNITARY DEMAND shows a given change in price causing a equally proportionate change in quantity demanded.
The elasticity coefficient (EP) is 1
An increase in price will cause Total Revenue to stay the same
So firms should not change their price.

Question 10

INELASTIC DEMAND
(Business)

Answer 10

INELASTIC DEMAND shows a given change in price causing a less than proportionate change in quantity demanded.
The Elasticity coefficient (EP) is < 1
An increase in price will cause Total Revenue to rise
So firms should increase price.

Question 11

ELASTIC DEMAND
(Business)

Answer 11

ELASTIC DEMAND shows a given change in price causing a more than proportionate change in quantity demanded.
The elasticity coefficient (EP) IS > 1
An increase in price will cause total revenue to decrease.
So firms should decrease their price.