interpreting elasticity of demand Flashcards
the price elasticity of demand (PED) of a product is:
how much the price change affects the demand.
it is found using the formula:
price elasticity of demand = % change in quantity demanded / % change in price
price elasticity of demand is always:
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
if the price elasticity of demand is greater than 1:
(ignoring the minus sign), the product is price elastic
if the price elasticity of demand is less than 1:
it’s price inelastic
-1.5 is:
price elastic
-0.5 is:
price inelastic
for price elastic products, the % change in demand is:
greater than the % change in price
for price inelastic products, the % change in demand is:
less than the % change in price
necessity (or necessary) products like milk are:
price inelastic. changing the price doesn’t affect demand much
if customers can switch to similar or competitor products (substitutes):
demand will be price elastic. e.g. if Princes tuna increases in price, people might buy John West tuna instead
businesses try to:
differentiate their products to create brand loyalty
loyal customers wont switch even if the price goes up, so this makes the product:
less price elastic
price elasticity of demand increases over time as:
customers have the chance to find alternative products
the internet makes it easy to find alternatives and so:
increases price elasticity
product types tend to be:
price inelastic
individual brands tend to be:
price elastic
items costing a greater proportion of customers’ incomes will be more:
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
how often a customer buys a product affects:
price elasticity of demand
a product that customers buy regularly is likely to be:
price inelastic. this is because a product that is bought more frequently is more likely to be a necessity to the consumer
the price elasticity of demand of a product could change, for example:
- 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
an increase in brand awareness can lead to more:
customer loyalty, which could make the product less price elastic
if the product became more of a necessity, this would make the product:
less price elastic. for example, mobile phones were once thought of as a luxury item, but are now seen as a necessity
a product that is price elastic has 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
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
sales revenue =
selling price x sales volume
price elasticity shows how:
price affects sales revenue (and therefore total revenue)
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
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
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
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
a person’s income can change, for example, because of:
changing jobs, getting a promotion, getting a pay rise or being dismissed
the average income of a nation will:
increase during economic growth and decrease during economic decline (a recession).
income elasticity of demand (YED) shows how:
the demand for a product changes as incomes change
income elasticity of demand =
% change in quantity demanded / % change in income
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
normal products have a:
positive income elasticity of demand
inferior products have a:
negative income elasticity of demand
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
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
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
a negative income elasticity of demand means:
demand falls when income rises and demand rises when income falls
if demand rises:
revenue rises
if demand falls:
revenue falls
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
if a product is price elastic, then businesses are:
more likely to set low and competitive prices to increase revenue
for a price inelastic product:
it’s likely that businesses will use high prices and price skimming to increase revenue
income elasticity helps a business see:
what will happen to sales if the economy grows or shrinks
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
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
