interpreting elasticity of demand Flashcards

1
Q

the price elasticity of demand (PED) of a product is:

A

how much the price change affects the demand.

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2
Q

it is found using the formula:

A

price elasticity of demand = % change in quantity demanded / % change in price

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3
Q

price elasticity of demand is always:

A

negative (a positive change in price causes a negative change in demand, and a negative change in price causes a positive change in demand) so you can just ignore the minus sign

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4
Q

if the price elasticity of demand is greater than 1:

A

(ignoring the minus sign), the product is price elastic

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5
Q

if the price elasticity of demand is less than 1:

A

it’s price inelastic

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5
Q

-1.5 is:

A

price elastic

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6
Q

-0.5 is:

A

price inelastic

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7
Q

for price elastic products, the % change in demand is:

A

greater than the % change in price

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8
Q

for price inelastic products, the % change in demand is:

A

less than the % change in price

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9
Q

necessity (or necessary) products like milk are:

A

price inelastic. changing the price doesn’t affect demand much

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10
Q

if customers can switch to similar or competitor products (substitutes):

A

demand will be price elastic. e.g. if Princes tuna increases in price, people might buy John West tuna instead

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11
Q

businesses try to:

A

differentiate their products to create brand loyalty

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12
Q

loyal customers wont switch even if the price goes up, so this makes the product:

A

less price elastic

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13
Q

price elasticity of demand increases over time as:

A

customers have the chance to find alternative products

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14
Q

the internet makes it easy to find alternatives and so:

A

increases price elasticity

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15
Q

product types tend to be:

A

price inelastic

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16
Q

individual brands tend to be:

A

price elastic

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17
Q

items costing a greater proportion of customers’ incomes will be more:

A

price elastic. customers won’t be too concerned about a 20% rise in the cost of a newspaper, but a 20% increase in the price of a car might cause them to look for alternatives

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18
Q

how often a customer buys a product affects:

A

price elasticity of demand

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19
Q

a product that customers buy regularly is likely to be:

A

price inelastic. this is because a product that is bought more frequently is more likely to be a necessity to the consumer

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20
Q

the price elasticity of demand of a product could change, for example:

A
  • if a competitor were to enter the market, then it would be easier for customers to switch to a different product. this means that the product could become more price elastic
21
Q

an increase in brand awareness can lead to more:

A

customer loyalty, which could make the product less price elastic

22
Q

if the product became more of a necessity, this would make the product:

A

less price elastic. for example, mobile phones were once thought of as a luxury item, but are now seen as a necessity

23
Q

a product that is price elastic has a:

A

shallow demand curve. this shows that the demand for the product is very dependent on the price - a small change in price leads to a large change in demand

24
a product that is price inelastic has a:
steep demand curve. the product isn't very dependent on price - a large change in price won't lead to a large change in demand
25
sales revenue =
selling price x sales volume
26
price elasticity shows how:
price affects sales revenue (and therefore total revenue)
27
if a product is price elastic, a price increase will make:
sales revenue go down. the money lost from the % decrease in sales will be more than the money gained from the % increase in price
28
for price elastic products, a firm can:
increase sakes revenue by reducing price - a small decrease in price will cause a large increase in demand
29
if a product is price inelastic, a rise in price will make:
sales revenue go up. the money lost from the % decrease in sales will be less than the money gained from the % increase in price
30
for price inelastic products, decreasing the price will make:
sales increase slightly, but sales revenue goes down because the price has fallen and only a few more units have been sold
31
a person's income can change, for example, because of:
changing jobs, getting a promotion, getting a pay rise or being dismissed
32
the average income of a nation will:
increase during economic growth and decrease during economic decline (a recession).
33
income elasticity of demand (YED) shows how:
the demand for a product changes as incomes change
34
income elasticity of demand =
% change in quantity demanded / % change in income
35
the income elasticity of demand of a product depends on:
whether the product is a normal product (a necessity or a luxury product) or an inferior product
36
normal products have a:
positive income elasticity of demand
37
inferior products have a:
negative income elasticity of demand
38
necessity products (e.g. fruit and vegetables) have a:
positive income elasticity of demand that's less than 1. this means that as income rises, demand rises - but at a slower rate than the increase in income
39
luxury products (e.g. designer clothes and fine wines) have a:
positive income elasticity of demand which is more than 1, meaning demand for luxury products grows faster than the increase in income
40
in a business sense, inferior products are:
cheaper 'value' products - e.g. a cheaper supermarket value brand of baked beans compared to Heinz Baked Beans
41
a negative income elasticity of demand means:
demand falls when income rises and demand rises when income falls
42
if demand rises:
revenue rises
43
if demand falls:
revenue falls
44
price elasticity helps a business decide:
whether to raise or lower the price of a product. they can see what might happen to the sales, and ultimately what will happen to sales revenue
45
if a product is price elastic, then businesses are:
more likely to set low and competitive prices to increase revenue
46
for a price inelastic product:
it's likely that businesses will use high prices and price skimming to increase revenue
47
income elasticity helps a business see:
what will happen to sales if the economy grows or shrinks
48
businesses that sell a range of products may decide to:
promote different products if incomes increase or decrease. for example, supermarkets such as Sainsbury's sell a range of luxury, necessity and inferior products
49
Sainsbury's might focus on promoting products with a:
negative income of elasticity of demand during times of low income, such as Sainsbury's basics products, but focus on promoting items with a positive income elasticity pf demand during times of higher income, such as Sainsbury's Taste the Difference products