Macro:Price Elasticity of Demand (PED)(1.2.4)

Question 1

What does Price Elasticity of Demand (PED) measure?

Answer 1

The responsiveness of demand after a change in the good’s own price.

Question 2

What is the basic formula for calculating the coefficient of price elasticity of demand?

Answer 2

Percentage change in quantity demanded divided by the percentage change in price.

Question 3

What is the typical coefficient of price elasticity of demand for normal goods?

Answer 3

Negative coefficient.

Question 4

When do we typically ignore the negative sign in PED calculations?

Answer 4

When changes in price and quantity usually move in opposite directions.

Question 5

What is the price elasticity of demand for the Kobo Mini E-reader after a price drop from £60 to £40?

Answer 5

Coefficient of PED = 2 (demand is price elastic).

Question 6

What happens to total revenue when demand is price elastic?

Answer 6

Total revenue will increase if prices are reduced.

Question 7

What is the coefficient of PED if demand is perfectly inelastic?

Answer 7

PED = 0.

Question 8

If PED is between 0 and 1, what type of demand is it?

Answer 8

Inelastic demand.

Question 9

What does it mean if PED = 1?

Answer 9

Demand is unitary elastic.

Question 10

What is the coefficient of PED for perfectly elastic demand?

Answer 10

PED = infinity.

Question 11

What occurs to total revenue if demand is inelastic and price increases?

Answer 11

Total revenue will increase.

Question 12

Fill in the blank: If demand is ______, a rise in price will lead to an increase in total revenue.

Answer 12

inelastic.

Question 13

What is surge pricing?

Answer 13

Dynamic pricing when market demand outstrips available supply.

Question 14

What factors determine the PED of a product?

Answer 14

Availability of substitutes, necessity vs luxury, proportion of income spent, time period.

Question 15

True or False: If consumers are becoming less price sensitive, it means PED is increasing.

Answer 15

False.

Question 16

What is one reason why businesses might be happy about consumers becoming less price sensitive?

Answer 16

Higher potential revenue during inflation.

Question 17

What is the PED if the price of an MP3 player rises by 10% and the demand falls by 10%?

Answer 17

PED = 1 (unitary elastic).

Question 18

What happens to demand when the price of cigarettes falls by 16% but the demand rises by only 8%?

Answer 18

PED < 1 (inelastic demand).

Question 19

What will Harry need to do to his prices to raise sales by 20% if his PED is -4?

Answer 19

Decrease the price by 5%.

Question 20

What is the effect on total revenue when demand is elastic and prices are lowered?

Answer 20

Total revenue will increase.

Question 21

Fill in the blank: With a demand curve of unitary price elasticity, total spending by consumers ______ at each price level.

Answer 21

remains the same.

Question 22

What is one criticism of Uber’s surge pricing policy?

Answer 22

It can be exploitative during emergencies.