interpreting elasticity of demand

Question 1

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

Answer 1

how much the price change affects the demand.

Question 2

it is found using the formula:

Answer 2

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

Question 3

price elasticity of demand is always:

Answer 3

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

Question 4

if the price elasticity of demand is greater than 1:

Answer 4

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

Question 5

if the price elasticity of demand is less than 1:

Answer 5

it’s price inelastic

Question 5

-1.5 is:

Answer 5

price elastic

Question 6

-0.5 is:

Answer 6

price inelastic

Question 7

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

Answer 7

greater than the % change in price

Question 8

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

Answer 8

less than the % change in price

Question 9

necessity (or necessary) products like milk are:

Answer 9

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

Question 10

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

Answer 10

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

Question 11

businesses try to:

Answer 11

differentiate their products to create brand loyalty

Question 12

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

Answer 12

less price elastic

Question 13

price elasticity of demand increases over time as:

Answer 13

customers have the chance to find alternative products

Question 14

the internet makes it easy to find alternatives and so:

Answer 14

increases price elasticity

Question 15

product types tend to be:

Answer 15

price inelastic

Question 16

individual brands tend to be:

Answer 16

price elastic

Question 17

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

Answer 17

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

Question 18

how often a customer buys a product affects:

Answer 18

price elasticity of demand

Question 19

a product that customers buy regularly is likely to be:

Answer 19

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

Question 20

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

Answer 20

• 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

Question 21

an increase in brand awareness can lead to more:

Answer 21

customer loyalty, which could make the product less price elastic

Question 22

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

Answer 22

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

Question 23

a product that is price elastic has a:

Answer 23

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

Question 24

a product that is price inelastic has a:

Answer 24

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

Question 25

sales revenue =

Answer 25

selling price x sales volume

Question 26

price elasticity shows how:

Answer 26

price affects sales revenue (and therefore total revenue)

Question 27

if a product is price elastic, a price increase will make:

Answer 27

sales revenue go down. the money lost from the % decrease in sales will be more than the money gained from the % increase in price

Question 28

for price elastic products, a firm can:

Answer 28

increase sakes revenue by reducing price - a small decrease in price will cause a large increase in demand

Question 29

if a product is price inelastic, a rise in price will make:

Answer 29

sales revenue go up. the money lost from the % decrease in sales will be less than the money gained from the % increase in price

Question 30

for price inelastic products, decreasing the price will make:

Answer 30

sales increase slightly, but sales revenue goes down because the price has fallen and only a few more units have been sold

Question 31

a person’s income can change, for example, because of:

Answer 31

changing jobs, getting a promotion, getting a pay rise or being dismissed

Question 32

the average income of a nation will:

Answer 32

increase during economic growth and decrease during economic decline (a recession).

Question 33

income elasticity of demand (YED) shows how:

Answer 33

the demand for a product changes as incomes change

Question 34

income elasticity of demand =

Answer 34

% change in quantity demanded / % change in income

Question 35

the income elasticity of demand of a product depends on:

Answer 35

whether the product is a normal product (a necessity or a luxury product) or an inferior product

Question 36

normal products have a:

Answer 36

positive income elasticity of demand

Question 37

inferior products have a:

Answer 37

negative income elasticity of demand

Question 38

necessity products (e.g. fruit and vegetables) have a:

Answer 38

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

Question 39

luxury products (e.g. designer clothes and fine wines) have a:

Answer 39

positive income elasticity of demand which is more than 1, meaning demand for luxury products grows faster than the increase in income

Question 40

in a business sense, inferior products are:

Answer 40

cheaper ‘value’ products - e.g. a cheaper supermarket value brand of baked beans compared to Heinz Baked Beans

Question 41

a negative income elasticity of demand means:

Answer 41

demand falls when income rises and demand rises when income falls

Question 42

if demand rises:

Answer 42

revenue rises

Question 43

if demand falls:

Answer 43

revenue falls

Question 44

price elasticity helps a business decide:

Answer 44

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

Question 45

if a product is price elastic, then businesses are:

Answer 45

more likely to set low and competitive prices to increase revenue

Question 46

for a price inelastic product:

Answer 46

it’s likely that businesses will use high prices and price skimming to increase revenue

Question 47

income elasticity helps a business see:

Answer 47

what will happen to sales if the economy grows or shrinks

Question 48

businesses that sell a range of products may decide to:

Answer 48

promote different products if incomes increase or decrease. for example, supermarkets such as Sainsbury’s sell a range of luxury, necessity and inferior products

Question 49

Sainsbury’s might focus on promoting products with a:

Answer 49

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