PED, PES

Question 1

Define PED (Price elasticity of demand)

Answer 1

The responsiveness/sensitivity of demand to changes in price.

Question 2

State the PED number of an elastic good

Answer 2

Greater than 1

Question 3

State the PED number of an inelastic good

Answer 3

Between 0 and 1

Question 4

Define elastic demand

Answer 4

Demand is sensitive to price changes

Question 5

Define inelastic demand

Answer 5

Demand is less sensitive to price changes

Question 6

State the formula to calculate PED

Answer 6

Percentage change in quantity demanded/Percentage change in price

Question 7

Determinant of PED (7)

Answer 7

addictiveness

time

Brand loyalty

Income

Substitutes

Necessity/Luxury

Ease and Cost of switching substitute

Question 8

Define perfectly price inelastic (D)

Answer 8

Quantity demand remains constant whatever the price

Question 9

State the PED value for a perfectly price inelastic graph

Answer 9

0

Question 10

Define infinitely price inelastic/perfectly price elastic (D)

Answer 10

Unlimited demand but only at one price

Question 11

State the PED value for an infinitely price inelastic graph/perfectly elastic graph

Answer 11

infinite

Question 12

Define unitary elasticity (D)

Answer 12

proportion which quantity demanded changes = proportion at which price changes

Revenue stays the same at any price

Question 13

State the PED for an unitary elastic graph

Answer 13

1

Question 14

Define revenue

Answer 14

the money a firm makes from sales

Question 15

Define total revenue (formula)

Answer 15

price x quantity sold

Question 16

State what a firm should do to price to maximise revenue when demand is inelastic

Answer 16

Increase price

Question 17

State what a firm should do to price maximise revenue when demand is elastic

Answer 17

decrease

Question 18

Define price elasticity of supply

Answer 18

Responsiveness of supply to a change in the price

Question 19

State the formula for PES

Answer 19

percentage change in quantity supplied/percentage change in price

Question 20

Explain why PES is always positive

Answer 20

The direct relationship between price and supply and the upwards slope of the supply curve causes PES to always be positive

Question 21

State the value of PES if it is elastic

Answer 21

PES > 1

Question 22

State the value of PES if it is inelastic

Answer 22

0< PES < 1

Question 23

Explain elastic PES

Answer 23

The quantity supplied will change by a greater proportion than the change in price

Question 24

Explain inelastic PES

Answer 24

The quantity supplied will change by a smaller proportion than the change in price

Question 25

State a factor which determines PES (T)

Answer 25

The time taken to produce it - Producers are able to respond immediately to a change in price

Question 26

State a factor which determines PES (C)

Answer 26

The cost of changing supply

Question 27

State a factor which determines PES (S)

Answer 27

Storage of good - Producers can respond to price changes better by changing stock levels --> PES more elastix

Question 28

Define perfectly inelastic supply

Answer 28

Supply is fixed no matter the price

Question 29

Define perfectly elastic supply

Answer 29

Unlimited supply at a fixed price

Question 30

How does PED change in an outward shift in demand

Answer 30

reduces PED as consumers are less sensitive since they want to buy more

Question 31

How does PED change in an inward shift in demand

Answer 31

increases PED as consumers are more sensitive since they have less of a desire to buy more

Question 32

Why do consumers benefit from elastic demand

Answer 32

producers reluctant to raise prices as demand would decrease by a greater proportion

Question 33

Why will firms want their supply to be as elastic as possible

Answer 33

profits will be higher as they can react more quickly to price increases

Question 34

Why are consumers likely to benefit from elastic demand (2)

Answer 34

more likely to get lower price - reluctant to increase price as consumers would react quickly more likely to get better quality - producers may remain competitive with substitutes, more distinct product lowers PED as it wont be seen as a substitute

Question 35

Why might a government need to know the PED of a good (3)

Answer 35

may want to discourage/encourage consumption of certain good more successful if demand elastic as change in price would cause greater change in quantity demanded less successful if demand inelastic as change in price would cause a smaller change in quantity demanded

Question 36

Why would consumers benefit from elastic supply

Answer 36

supply is responsive to consumer demand - changes in price to changes in quantity demanded cause no shortages or surpluses

Question 37

Why might producers want supply to be elastic

Answer 37

higher profits as they can adjust supply in response to price/demand

Question 38

Why may governments want supply to be elastic

Answer 38

more effective in changing demand - less money required to change