PED

Question 1

Define PED (Price Elasticity of Demand)

Answer 1

• degree of responsiveness
• of Qdd of gd
• to change in price of gd
• ceteris paribus

Question 2

Measurement

Answer 2

% change in Qdd of Gd X/ %change in price of Gd X

Question 3

SIgn of PED

Answer 3

• always negative
• law of demand
• inverse relationship btwn price and Qdd of gd

Question 4

Interpretation of PED value

Answer 4

• absolute value (ignore - sign)

- higher absolute value, dd for gd more price elastic (more responsive)

Question 5

Demand perfectly price inelastic

Answer 5

• PED=0
• Qdd of gd does not change at all when price changes
• e.g. medical supplies (insulin)
• draw graph

Question 6

Demand is price inelastic

Answer 6

• more than 0 less than 1
• price change
• less than proportionate change in Qdd
• e.g. price increase by 10%, Qdd of gd falls by 5%
• necessities

Question 7

Demand is of unitary elasticity

Answer 7

• PED= 1
• change in price
• same percentage change in Qdd
• ceteris paribus
• e.g. price increase by 5%, Qdd falls by 5%

Question 8

Demand is price elastic

Answer 8

• more than 1, less than infinity
• more responsive
• price change
• more than proportionate change in Qdd
• e.g. price increase by 1%, Qdd falls by 2%

Question 9

Demand in perfectly elastic

Answer 9

• PED= infinity
• change in price
• Qdd falls to zero
• e.g. wet market veg stalls (sell similar items)

Question 10

Steepness of De and Di gradient

Answer 10

• Di: Steeper gradient

- De: gentler gradient

Question 11

Determinants of PED (TIN CAN)

Answer 11

1. Number and closeness of substitutes
2. Proportion of income spent on gd
3. Nature of gd
4. Time Period

Question 12

Number and closeness of substitutes

Answer 12

• narrowly defined: many close substitutes, more price elastic
• e.g. sports shoes; brands within same price range
• broad category: no close substitutes, more price inelastic
• e.g. rice

Question 13

Proportion of income spent on good

Answer 13

• proportion of income spent on gd small, dd price inelastic
• e.g. salt and pepper (small part of household’s total expenditure)
• no gr8 effort to search for substitutes even if there’s a large % increase in price
• vice versa (large proportion, rise in price cause consumers to cut down substantially on Qdd of gds ie. cars)

Question 14

Nature of good

Answer 14

• degree of necessity
• Luxury: price elastic, manage w/o them, price rise, substantially reduce consumption
• Basic: price inelastic, need to survive
• Habit-forming: price inelastic e.g. cigarettes (addicted)

Question 15

Time period

Answer 15

• shorter time period aft price change, dd more price inelastic (generally)
• time to react, convinced that it is permanent
• time to change consumption patterns
• longer time aft price change, dd more price elastic