PED

Question 1

Price Elasticity of Demand

Answer 1

a measure of the percentage change in quantity demanded from a percentage change in price
(equation)

Question 2

Elastic PED

Answer 2

% change in demand > % change in price
PED > (-)1
Demand has a high responsiveness to price changes

Question 3

What do the firms do if they have elastic PED?

Answer 3

Lower price to increase revenue

Question 4

Inelastic PED

Answer 4

% change in demand < % change in price
PED < (-)1
Demand has a low responsiveness to price changes

Question 5

What do the firms do if they have inelastic PED?

Answer 5

Higher price to increase revenue. When demand is price inelastic, an increase in price causes a smaller proportional decrease in quantity demanded, which leads to an increase in revenue for business

Question 6

Unitary PED

Answer 6

% change in demand = % change in price
PED = (-)1
Revenue remains constant at any price

Question 7

What do the firms do if they have unitary PED?

Answer 7

Try to change to either elastic or inelastic PED

Question 8

Perfectly inelastic PED

Answer 8

same amount of demand at any price

PED = 0

Question 9

What do the firms do if they have perfectly inelastic PED?

Answer 9

Increase in price causes no change in demand, which increases revenue for a business. Business should increase prices as high as they can.

Question 10

Perfectly elastic PED

Answer 10

Any amount of demand at the same price

PED = infinity

Question 11

What do the firms do if they have perfectly elastic PED?

Answer 11

Increase in price results in 0 demand and 0 revenue. Business should keep price constant but increase the QUANTITY SUPPLIED.

Question 12

List out some determinants of PED

Answer 12

1. The no. of substitutes
2. Similarity of substitutes
3. Necessity or luxury
4. Addictiveness
5. Habit-forming
6. Brand loyalty
7. Price as % of income
8. The width of definition
9. Time

Question 13

How does the no. of substitutes affect PED?

Answer 13

If there are many / not many substitutes, costumers are more / less likely to switch to alternatives when price changes, therefore PED will be elastic / inelastic

Question 14

How does the similarity of substitutes affect PED?

Answer 14

If substitutes are not similar, customers are __less_____ likely to switch to alternatives when price changes, therefore PED will be ___inelastic____.

Question 15

How does a necessary / luxury good affect PED?

Answer 15

If the product is a luxury, consumers are likely to be ___more____ sensitive to price changes, therefore PED will be ____elastic___.

Question 16

How does the addictiveness affect PED?

Answer 16

If the product is addictive, consumers are likely to be ___less____ sensitive to price changes, therefore PED will be __inelastic_____.

Question 17

How does habit-forming affect PED?

Answer 17

If the product is habit-forming, consumers are likely to be ___less____ sensitive to price changes, therefore PED will be ___inelastic____.

Question 18

How does brand-loyalty affect PED?

Answer 18

If there is strong brand loyalty, consumers are likely to be __less_____ sensitive to price changes, therefore PED will be _inelastic______.

Question 19

How does price as % of income affect PED?

Answer 19

If price is a high % of income (e.g. car), consumers are likely to be ___more____ sensitive to price changes, therefore PED will be __elastic_____.

Question 20

How does the width of definition affect PED?

Answer 20

The wider the definition of the product (e.g. food), the ___less____ sensitive to price changes a consumer will be, therefore PED will be __inelastic_____.

Question 21

How does time affect PED?

Answer 21

In the short term, consumers are likely to be _less______ sensitive to price changes as they are __unable_____ to seek alternatives, therefore PED will be ___inelastic____.