PED Flashcards
Define derived demand
Demand for a factor of production used to produce another good or service
Effective demand
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
Joint demand
Demand for one product is directly and positively related to market demand for a related good or service
Composite demand
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
Define Price Elasticity of demand
Measures the responsiveness of demand to a given change in price
Define price elastic
Demand is said to be price elastic when a change in price causes a proportionately larger change in demand
Define price inelastic
If a change in price causes a proportionately smaller change in demand, demand is said to be price inelastic
Give an example of derived demand
Steel - demand fro steel is linked to market demand for cars and construction of new buildings
Define demand
The quantity of a good or service consumers are willing and able to purchase at a given price over a given period of time
State the determinants of price elasticity of demand
1) Number of substitutes
2) necessity/luxury
3) addictiveness
4) time
5) proportion of income
How does number of substitutes affect PED
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
How does necessity/luxury affect PED
- 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
How does addictiveness affect PED
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
How does time affect PED
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
How does proportion of income spent on the product affect PED
- 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
How does an increase in AD affect the economy
increases the multiplier effect
State the equation for PED
- percentage change in QD/ percentage change in price
- remember to write this formula as well as percentage change formula
- (new - original)/(original) x 100
What is a common misconception with PED
to write it as a % -DON’T
Define uitary elastic PED
where PED=1: quantity demanded changes by exactly the
same percentage as price
Define relatively elastic PED
PED>1: quantity demanded changes by a larger % than price so demand is relatively responsive to price. The curve will be less steep
Define relatively inelastic PED
where PED < 1 : quantity demanded changes by a smaller % than price so demand is relatively unresponsive to price. The curve will be steep
Define perfectley elastic PED
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
Define Perfectly inelastic PED
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.
