Price Elasticity of Demand

Question 1

What does price elasticity of demand measure?

Answer 1

How responsive quantity demanded is to changes in price

Question 2

When measuring price elasticity of demand, the answer will always be what?

Answer 2

Negative

Question 3

When measuring price elasticity of demand the answer will always be negative, what does this represent?

Answer 3

The inverse relationship between price and demand - if prices rise then demand will fall and vice versa

Question 4

Give three things that price elasticity of demand is affected by?

Answer 4

Number of substitutes
Time
Whether its a necessity or a luxury ( necessities tend to be price inelastic, luxuries tend to be elastic)

Question 5

The more consumer substitutes available the more elastic demand will be, why?

Answer 5

Consumers can easily switch products

Question 6

Give three uses of price elasticity of demand?

Answer 6

Helps firms to determine the optimum price to charge
Helps firms to decide whether to increase or decrease the price
Can be used to calculate the impact of a price change on sales Revenue

Question 7

Give three limitations of price elasticity of demand?

Answer 7

Values are based on estimates
Information used to calculate price elasticity of demand may become outdated
Other factors may shift the demand curve cancelling out the quantity demanded affect