Micro:Elasticity-Price Elasticity of Demand

Question 1

What is Price Elasticity of Demand?

Answer 1

Price Elasticity of Demand (PED) measures the responsiveness of demand after a change in the good’s own price.

Question 2

How is the coefficient of price elasticity of demand calculated?

Answer 2

The basic formula is: Percentage change in quantity demanded divided by the percentage change in price.

Question 3

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

Answer 3

-All normal goods with downward sloping demand curves will have a negative coefficient of price elasticity of demand.

Question 4

What does it mean if demand is elastic?

Answer 4

If PED > 1, demand responds more than proportionately to a change in price.

Question 5

What does it mean if demand is inelastic?

Answer 5

If PED < 1, demand is said to be price inelastic, meaning it is unresponsive to a change in price.

Question 6

What is perfectly elastic demand?

Answer 6

Perfectly elastic demand occurs when buyers are prepared to purchase all they can obtain at a given price but none at a higher price.

Question 7

What is perfectly inelastic demand?

Answer 7

Perfectly inelastic demand means that demand does not change when the price changes; the demand curve is vertical.

Question 8

What is unitary elastic demand?

Answer 8

Unitary elastic demand occurs when PED = 1, meaning a change in price is met with a proportionate change in demand.

Question 9

What happens to total revenue when demand is inelastic?

Answer 9

If demand is inelastic (PED < 1), a rise in market price will lead to an increase in total revenue for the seller.

Question 10

What factors determine the PED of a product?

Answer 10

Factors include
-the number of close substitutes
-the price of the product in relation to total income
- cost of substituting products
-brand loyalty, and habitual consumption
-degree of necessity or luxury.

Question 11

Why are consumers becoming more price sensitive?

Answer 11

Consumers are becoming less price sensitive due to various factors, including changes in economic conditions and consumer behavior.

Question 12

What is surge pricing? (in the case of Uber)

Answer 12

Surge pricing is a strategy used by Uber to raise fares when market demand outstrips available supply, encouraging more drivers to take to the roads.

Question 13

What are some limitations of elasticities?

Answer 13

Limitations include inaccurate
-data collection
-changes in consumer price sensitivity over time
- variations in elasticity by region or product range.
-Not all businesses are profit maximisers
-Elasticity will vary within product ranges e.g. economy and premium products
-Rival producers will change their market strategies from time to time

Question 14

Wha is surge pricing also known as?

Answer 14

Dynamic prices

Question 15

What is surge pricing also known as?

Answer 15

Dynamic prices

Question 16

How does Ubers price surging work? (explain why they do this and what this incentives )

Answer 16

-When market demand out-strips available supply e.g. at peak times, then Uber raises the average fare on their app
-The aim is to encourage more drivers to take to the roads to expand supply
-The business is taking advantage of low price elasticity of demand at busy times

Question 17

What can firms ues PED to predict?

Answer 17

1. The effect of a change in price on total revenue of sellers
2. The price volatility in a market following changes in supply – this is important for commodity producers who suffer big price and revenue shifts from one time period to another.
3. The effect of a change in an indirect tax on price and quantity demanded and also whether the business is able to pass on some or all of the tax onto the consumer.

Question 18

What is price discrimination?

Answer 18

This is where a supplier decides to charge different prices for the same product to different segments of the market e.g. peak and off peak rail travel or prices charged by many airlines.

Question 19

What is price discrimination?

Answer 19

This is where a supplier decides to charge different prices for the same product to different segments of the market e.g. peak and off peak rail travel or prices charged by many airlines.

Question 20

As what elasticity is price surging/discrimination more common?

Answer 20

Usually a business will charge a higher price to consumers whose demand is price inelastic

Question 21

Lable the blue and yellow area. What type of graph is it ( what PED does it represent)

Answer 21

Inelastic Demand (Ped < 1)

Question 22

Describe what will happen following a change in price (this graph is PED<1)

Answer 22

Following a change in price, the total revenue earned by the producing firm will depend on the PED for its product.

Question 23

Describe what will happen following a rise in price (this graph is PED<1)

Answer 23

If the coefficient of PED is <1, a rise in market price (e.g. from P1 to P2) will lead to an increase in total revenue for the seller of the product.

Question 24

Lable the colored arease on Elastic Demand (Ped > 1) graph.

Answer 24

Question 25

What will the graph at Unitary Elastic Demand (Ped = 1) look like?

Answer 25

Question 26

What is a change in price met with on this graph ? What does this mean about consumer spending?

Answer 26

-A change in price is met with a proportionate change in demand
-This means that total spending by consumers on the product will remain the same at each price level