Price determination in a competitive market (demand) Flashcards
PED
Measures how much quantity demanded will respond to a change in price
Formula for PED
% change in QD/ % change in price
What happened when demand is elastic
Consumers are more responsive to changes in price
when PED is between -1 and - infinity
its elastic
When PED is between -1 and 0
It’s inelastic
What happens when demand is inelastic
Consumers are unresponsive to changes in price
What’s is unitary elastic demand
When PED is -1
factors that influence PED
- Necessity
- Addiction
- Availiability of substitutes
- Brand loyalty
- Income
- Time period
Are necessities inelastic or elastic
Inelastic, cause consumers are less responsive to a change in price as they will still demand similar quantity. This is because we can’t live without these so we will buy it regardless of the price
Are luxuries inelastic or elastic
Elastic, because consumers are more responsive to a change in price as when prices increase, because consumers don’t need these, they can just stop buying it and this would decrease the quantity demanded
Are addictive products elastic or inelastic
Inelastic, because if price changes, addicted consumers will be forced by their addiction to continue to demand similar quantity, so demand will not be responsive to changes price
Are a product with less substitutes inelastic or elastic
Inelastic, because there are few substitutes from them, so consumers have fewer options so if the prices were to change they would still continue to demand due to low substitutes. Demand would not be responsive to a change in price.
Are products with many substitutes elastic or inelastic
Elastic, because they have many substitutes and they could just switch to a different product. If the price of walkers crisps cheese & onion crisps were to increase, consumers could easily switch to other crisps, so demand would be responsive to changes in prices.
When is total revenue maximised in PED
- if the product is price inelastic in demand, they should raise prices
- if the product is price elastic in demand, they should lower prices
What is the relationship between total revenue and price elastic demand
- when a good is price elastic in demand, there is a greater proportional increase in QD to a decrease in price (small decrease in price leads to larger increase in QD)
- TR IS HIGHER WHEN PRICE IS DECREASED
- (EOIS)
WHat is the relationship between total revenue and price inelastic in demand
- when good is price inelastic in demand, there is a smaller than proportional decrease in the quantity demanded to an increase in price (large increase in price leads to a smaller decrease in QD)
- TR IS HIGHER WHEN PRICE IS INCREASED)
- (EOIS)
What is YED
Measures how much quantity demanded will respond to a change in income
Formula for YED
% change in QD/ % change in income
The relationship between inferior goods and YED
- the QD of an inferior good will increase, as when incomes fall consumers switch to cheaper products
- if incomes increase, the QD of inferior goods will fall as consumers will buy normal goods
What are the figures of inferior goods
Always negative
The relationship between normal goods and YED
- When incomes rise, the QD for normal goods will increase
- When incomes fall, the QD for normal goods will decrease
What are the figures for normal goods
Always positive
In YED, when goods are less than 1, what are they
income inelastic goods ( necessities) as when incomes rise we demand a similar quantity
In YED, when goods are bigger than 1, what are they
income elastic goods ( luxuries ) as when incomes rises there’s a larger increase in the QD
