PED

Question 1

Define derived demand

Answer 1

Demand for a factor of production used to produce another good or service

Question 2

Effective demand

Answer 2

Effective demand is when a desire to buy a product is backed up by having an ability to pay - in other words, consumers have sufficient income in their budget to make purchases

Question 3

Joint demand

Answer 3

Demand for one product is directly and positively related to market demand for a related good or service

Question 4

Composite demand

Answer 4

Where a product has more than one use so that an increase in demand for one product leads to a fall in supply of the other

Question 5

Define Price Elasticity of demand

Answer 5

Measures the responsiveness of demand to a given change in price

Question 6

Define price elastic

Answer 6

Demand is said to be price elastic when a change in price causes a proportionately larger change in demand

Question 7

Define price inelastic

Answer 7

If a change in price causes a proportionately smaller change in demand, demand is said to be price inelastic

Question 8

Give an example of derived demand

Answer 8

Steel - demand fro steel is linked to market demand for cars and construction of new buildings

Question 9

Define demand

Answer 9

The quantity of a good or service consumers are willing and able to purchase at a given price over a given period of time

Question 10

State the determinants of price elasticity of demand

Answer 10

1) Number of substitutes
2) necessity/luxury
3) addictiveness
4) time
5) proportion of income

Question 11

How does number of substitutes affect PED

Answer 11

the more substitutes a product has, the greater the dgeree of consumer switching wll be when there is a change in rpice
- more substitutes there are = more elastic demand is

Question 12

How does necessity/luxury affect PED

Answer 12

• necessity = inelastic, luxury = elastic
• if a product is considered a necessity, demand is likely to be price inelastic as people require the product no matter what the price is

Question 13

How does addictiveness affect PED

Answer 13

the more addictive a product is the more price inelastic demand as people are willing to purchase the good regardless of price as they cannot live without - they are reliant on it

Question 14

How does time affect PED

Answer 14

time gives consumers the opportunity to find alternatives, Therefore, the greater the time period, the more price elastic demand it
- lots of time = elastic
- less time = inelastic

Question 15

How does proportion of income spent on the product affect PED

Answer 15

• the greater the proportion of income spent on a product the less able consumers will be to afford any price increases. Therefore, the greater the prportion of income spent on product, the more price elastic demand will be
• large prop = elastic, small prop = inelastic

Question 16

How does an increase in AD affect the economy

Answer 16

increases the multiplier effect

Question 17

State the equation for PED

Answer 17

• percentage change in QD/ percentage change in price
• remember to write this formula as well as percentage change formula
• (new - original)/(original) x 100

Question 18

What is a common misconception with PED

Answer 18

to write it as a % -DON’T

Question 19

Define uitary elastic PED

Answer 19

where PED=1: quantity demanded changes by exactly the
same percentage as price

Question 20

Define relatively elastic PED

Answer 20

PED>1: quantity demanded changes by a larger % than price so demand is relatively responsive to price. The curve will be less steep

Question 21

Define relatively inelastic PED

Answer 21

where PED < 1 : quantity demanded changes by a smaller % than price so demand is relatively unresponsive to price. The curve will be steep

Question 22

Define perfectley elastic PED

Answer 22

Perfectly elastic PED is where PED=infinity: a change in price means that quantity falls to 0 and demand is very responsive to price. This would be shown by a
horizontal line

Question 23

Define Perfectly inelastic PED

Answer 23

Perfectly inelastic PED is where PED=0 : a change in price has no effect on output so demand is completely unresponsive to price. This would be shown by a vertical
line.