Paper 1- Theme 1.2 Market (only done 1.2.4) Flashcards
How to calculate price elasticity of demand
PED = % change in demand
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% change in price
remember as d before p in alphabet so d on top
define price elasticity of demand
how responsive demand is to changes in price
define an elastic demand curve
when a % change in price has a proportionally larger %. change in demand
define an inelastic demand curve
when a % change in price has a proportionally smaller % change in demand
effect of a price rise on inelastic demand curve
proportionally smaller decrease in quantity demanded
effect of a price rise on elastic demand curve
proportionally larger decrease in quantity demanded
factors influencing the price elasticity of demand
- available substitutes
- brand loyalty
- degree of product differentiation
- nature of product (luxury, necessity, perfectly inelastic products like medicine)
- income level of customers
define inelastic good
when price increases, total revenue increases
define elastic good
when price increases, total revenue decreases
less customers buy it
what is the PED of a price elastic product
any number greater than 1
- sign ignored
what is the PED of a price inelastic product
any number less than 1
- sign ignored
name of the elasticity a product has when it has a elasticity coefficient of exactly 1
unitary elasticity
effect of price cut on a elastic good
revenue rises due to a sharp rise in sales
uses of price elasticity of demand
- forecast sales when prices change
- aids pricing strategy decision
strategies to reduce price elasticity
•have to reduce substitutability
- increasing product differentiation (function, brand image, flavour)
- reduce competition (predatory pricing, hostile takeover)
