PED Flashcards
Price Elasticity of Demand
a measure of the percentage change in quantity demanded from a percentage change in price
(equation)
Elastic PED
% change in demand > % change in price
PED > (-)1
Demand has a high responsiveness to price changes
What do the firms do if they have elastic PED?
Lower price to increase revenue
Inelastic PED
% change in demand < % change in price
PED < (-)1
Demand has a low responsiveness to price changes
What do the firms do if they have inelastic PED?
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
Unitary PED
% change in demand = % change in price
PED = (-)1
Revenue remains constant at any price
What do the firms do if they have unitary PED?
Try to change to either elastic or inelastic PED
Perfectly inelastic PED
same amount of demand at any price
PED = 0
What do the firms do if they have perfectly inelastic PED?
Increase in price causes no change in demand, which increases revenue for a business. Business should increase prices as high as they can.
Perfectly elastic PED
Any amount of demand at the same price
PED = infinity
What do the firms do if they have perfectly elastic PED?
Increase in price results in 0 demand and 0 revenue. Business should keep price constant but increase the QUANTITY SUPPLIED.
List out some determinants of PED
- The no. of substitutes
- Similarity of substitutes
- Necessity or luxury
- Addictiveness
- Habit-forming
- Brand loyalty
- Price as % of income
- The width of definition
- Time
How does the no. of substitutes affect PED?
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
How does the similarity of substitutes affect PED?
If substitutes are not similar, customers are __less_____ likely to switch to alternatives when price changes, therefore PED will be ___inelastic____.
How does a necessary / luxury good affect PED?
If the product is a luxury, consumers are likely to be ___more____ sensitive to price changes, therefore PED will be ____elastic___.
How does the addictiveness affect PED?
If the product is addictive, consumers are likely to be ___less____ sensitive to price changes, therefore PED will be __inelastic_____.
How does habit-forming affect PED?
If the product is habit-forming, consumers are likely to be ___less____ sensitive to price changes, therefore PED will be ___inelastic____.
How does brand-loyalty affect PED?
If there is strong brand loyalty, consumers are likely to be __less_____ sensitive to price changes, therefore PED will be _inelastic______.
How does price as % of income affect PED?
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_____.
How does the width of definition affect PED?
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_____.
How does time affect PED?
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____.
