firms, consumers + elasticities of demand

Question 1

Define and give the formula for Price Elasticity of Demand.

Answer 1

PED is the responsiveness of quantity demanded given a change in price.

PED = change in percentage of quantity / change in percentage of price.

Question 2

What does PED = 1 represent?

Answer 2

A unitary elastic good, where the change in price is equal to the change in quantity demanded.

Question 3

Name the 6 factors influencing elasticity of demand?

Answer 3

• Necessity
• Substitutes
• Habitual consumption
• Proportion of income spent
• Durability
• Peak/off-peak demand

Question 4

How does the number of substitutes affect the elasticity of demand for the good?

Answer 4

The more substitutes there are, the more price elastic the good is.

Question 5

Describe the concept of price skimming.

Answer 5

A short-term pricing strategy that usually occurs when a new product is released, whereby a high price is set before new firms enter the market and increase competition.

Question 6

How does predatory pricing differ from price penetration?

Answer 6

Predatory pricing aims to push incumbents out of the market, whereas price penetration aims to boost customer loyalty.

Question 7

List the 3 factors that determine the most appropriate pricing strategy.

Answer 7

• Number of USPs
• Price elasticity of demand
• Stage in product life cycle

Question 8

Give the formula for income elasticity of demand.

Answer 8

YED = change in percentage of quantity demanded / change in percentage of income

Question 9

Define inferior goods and give their YED value.

Answer 9

Goods that experience a reduction in demand as income increases.

YED less than 0.

Question 10

Name the type of good with a YED greater than 1.

Answer 10

Normal luxury goods.