Macro:Price Elasticity of Demand (PED)(1.2.4) Flashcards
What does Price Elasticity of Demand (PED) measure?
The responsiveness of demand after a change in the good’s own price.
What is the basic formula for calculating the coefficient of price elasticity of demand?
Percentage change in quantity demanded divided by the percentage change in price.
What is the typical coefficient of price elasticity of demand for normal goods?
Negative coefficient.
When do we typically ignore the negative sign in PED calculations?
When changes in price and quantity usually move in opposite directions.
What is the price elasticity of demand for the Kobo Mini E-reader after a price drop from £60 to £40?
Coefficient of PED = 2 (demand is price elastic).
What happens to total revenue when demand is price elastic?
Total revenue will increase if prices are reduced.
What is the coefficient of PED if demand is perfectly inelastic?
PED = 0.
If PED is between 0 and 1, what type of demand is it?
Inelastic demand.
What does it mean if PED = 1?
Demand is unitary elastic.
What is the coefficient of PED for perfectly elastic demand?
PED = infinity.
What occurs to total revenue if demand is inelastic and price increases?
Total revenue will increase.
Fill in the blank: If demand is ______, a rise in price will lead to an increase in total revenue.
inelastic.
What is surge pricing?
Dynamic pricing when market demand outstrips available supply.
What factors determine the PED of a product?
Availability of substitutes, necessity vs luxury, proportion of income spent, time period.
True or False: If consumers are becoming less price sensitive, it means PED is increasing.
False.
What is one reason why businesses might be happy about consumers becoming less price sensitive?
Higher potential revenue during inflation.
What is the PED if the price of an MP3 player rises by 10% and the demand falls by 10%?
PED = 1 (unitary elastic).
What happens to demand when the price of cigarettes falls by 16% but the demand rises by only 8%?
PED < 1 (inelastic demand).
What will Harry need to do to his prices to raise sales by 20% if his PED is -4?
Decrease the price by 5%.
What is the effect on total revenue when demand is elastic and prices are lowered?
Total revenue will increase.
Fill in the blank: With a demand curve of unitary price elasticity, total spending by consumers ______ at each price level.
remains the same.
What is one criticism of Uber’s surge pricing policy?
It can be exploitative during emergencies.
