PED & YED

Question 1

the GOLDEN RULE

Answer 1

When prices rise, demand falls When prices fall, demand rises

Question 2

Types of goods

Answer 2

● Luxury goods = you could cut back on considerably
● Normal goods – you would cut back on slightly
● Inferior goods – you may now buy more of these

Question 3

PRICE ELASTICITY OF DEMAND (PED)

Answer 3

● Price elasticity of demand measures the responsiveness of demand to a change in price
● You can think of PED as the way that consumers react (how much of a good they demand) as the price changes
● This reaction in demand to a change in price will impact on revenue

Question 4

Percentage change

Answer 4

New value – old value Percentage
change = old value X100

Question 5

Percentage change

Answer 5

a)10/120 X100 = 8.33% increase b)1400/4300 X 100 = 32.56% decrease

Question 6

PED

Answer 6

PED = % change in quantity demanded % change in price

Question 7

PED - elastic

Answer 7

•A demand curve is Elastic when a percentage change in price results in a proportionally LARGER percentage change in quantity demanded.
● I.E BIG reaction from the customer
● PED = >1
Increase price= decrease demand
Decrease price= increase demand

Question 8

PED - elastic

Answer 8

A market approaching perfect competition, elasticity is likely to be highly elastic

Question 9

PED - inelastic

Answer 9

● A demand curve is Inelastic when a percentage change in price results in a proportionally smaller percentage change in quantity demanded.
● I.E SMALL reaction from the customer
● PED = <1
Increase price= decrease demand
Decrease price= increase demand

Question 10

PED - inelastic

Answer 10

Likely to occur when levels of competition are low, few substitutes or the goods are a necessity or perhaps addictive.
Co’s have much more control over PRICE

Question 11

Be precise

Answer 11

● Often students say that a product is elastic or inelastic
● This lacks precision
● You should refer to the demand of the product, and be clear which elasticity you are referring to e.g.
● A product is elastic = a product has price elastic demand

Question 12

Impacts on revenue - example

Answer 12

● A business has a price elastic demand
● They have 5 customers who pay £5 each for the product. This gives the business revenue of £25
● Then the business increases prices by £2.
● Revenue is now £21 – it has fallen. Though some customers remain and pay the higher price; this business has lost two customers.
● Perhaps they are now buying from rival businesses and so overall the business looses out.
● However, if a business has price inelastic demand and starts off in the same position with 5 customers and £25 revenue, and they raise the price by £2.
● They only lose one customer and demand is not responsive to changes in price.
● The business selling the product with price inelastic demand sees a rise in revenue of £28 because most customers stay loyal to the business and will pay more for the product

Question 13

Why is knowing PED important?

Answer 13

● Co’s prefer demand of goods to be inelastic as they have more control over price – price makers not price takers
● Inelastic = more revenue
● Elastic = less revenue
● Impacts the use of marketing – goods can become more inelastic if:
● Encourage customer loyalty – apple
● Reduce or restrict competition – amazon
● Increase brand value – sharpie pens

Question 14

Income elasticity of demand

Answer 14

● Income elasticity of demand (YED) measures how much the demand for a good changes with a change in real income.
● YED links the pattern of changing demand to changing income.

Question 15

Income elasticity of demand

Answer 15

YED = % change in quantity demanded
% change in consumers real income

Question 16

Income elasticity of demand

Answer 16

Calculate YED when:
Symonds sausages have found that if income increases by 5% the demand for their premium sausages increases by 10%

Question 17

Income elasticity of demand

Answer 17

● YED – >1 elastic. A change in income causes a more than proportional change in the quantity demanded
●
E.g. income increase 5% leads to decrease 10% demand of Pizzas
YED – <1 inelastic. A change in income causes a less than proportional; change in the quantity demanded. E.g. income decrease 4% leads to decrease 2% demand for toothpaste
● YED – negative. A rise in income causes a fall in demand
E.g. income increase 6% leads to decrease in demand for own brand lemonade (inferior good)

Question 18

Does the sign matter? PED

Answer 18

● PED = we interpret the number and ignore the sign (usually it is a negative)

Question 19

Does the sign matter? YED

Answer 19

● YED = we interpret the number and the sign as it gives an indication of the type of ‘good’ being discussed. Negative indicates an “inferior good”. Positive indicates a “normal” or “luxury good”