PeD Flashcards
What is PeD?
Price elasticity of demand.
It measures the responsiveness of quantity demanded to a change in the price of a good.
What factors determine PeD?
Availability of substitutes.
Time.
Whether the good is a luxury or a necessity.
Proportion of income spent on the good.
What happens when PeD equals 0?
The good is perfectly inelastic in demand.
When price changes there is no effect on a quantity demanded at all. Demand remains the same.
When prices fall, because quantity demanded does not change at all, then total revenue must fall.
What is the PeD formula?
Percentage change in quantity demanded
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Percentage change in price
What happens when PeD is infinity?
The good has a perfectly elastic demand.
This means that a fall in price leads to an infinite change in the level of quantity demanded.
A fall in price leads to increases in total revenue.
What happens when PeD is between 0 and -1?
The good has a price inelastic demand.
When prices fall, quantity demanded increases but by a smaller proportion than a fall in price.
When price falls, total revenue will fall.
What happens when PeD equals -1?
The good has a unitary price elasticity of demand.
A change in price brings about the same proportionate change in quantity demanded.
Total revenue will remain the same from a price cut.
What happens when PeD is below -1?
The good has a price elastic demand.
A fall in price means quantity demanded rises by proportionately more than the price cut.
A fall in price will increase total revenue.
