PED(Chapter 11)

Question 1

What is Price elasticity of demand?

Answer 1

Price elasticity of demand measures how sensitive the demand for a product is to changes in its price. It tells us how much the quantity demanded will change when the price changes.

price elastic -
- High PED = small change in price = big change in quantity demand
- when PED is greater than 1 = elastic

price inelastic -
- Low PED = Large change in price = small change in quantity demand
- when PED less than 1 = inelastic

Question 2

How do you calculate PED?

Answer 2

PED = % change in quantity demanded/% change in price

PED = (Change in quantity /OG quantity) x 100)/(Change in price/OG price) x 100)

Question 3

What affects the price sensitivity of demand?

Answer 3

1. If the product is a necessity
2. The number of close substitutes the product has.
3. The amount of time consumer have to search for other substitutes before its needed - If consumers have more time to search for alternative products, it means they can spend more time comparing prices, quality, and features of different products.
4. The cost of switching to a new supplier- When the cost of switching to a different supplier is high, it means that consumers would incur additional expenses or face inconvenience in transitioning to a new product or supplier.
5. The proportion of a consumers income spent on the product - If a product takes up a large portion of a consumer’s income, they are more likely to be sensitive to price changes because the price increase has a greater impact on their overall budget.

Question 4

The relationship between PED and total consumer spending on a product

Answer 4

If the price of the product increases, consumers are likely to reduce their quantity demanded, resulting in a decrease in total consumer spending on the product.

If the product has a lower price elasticity of demand, consumers are less sensitive to price changes, and total consumer spending on the product may be less affected by price fluctuations.

Question 5

Why is PED important?

Answer 5

It allows firms to optimize the pricing and promotional strategies for their product to best achieve their profit targets.