Price Elasticity of Demand

Question 1

• 1. What is* elasticity?*****

Answer 1

Elasticity is the responsiveness of X to a change in another variable.

Question 2

What is PED?

Answer 2

Price elasticity of demand measures the responsiveness of **demand after a change in the goods own price.**

Question 3

What if the PED=0?

Answer 3

Its perfectly inelastic -demand does not change when prices changes

• the demand curve is vertical

Question 4

What if the PED IS 0-1?

Answer 4

% change in demand is less than the % change in its own price , then its demand is inelastic as

Question 5

What if the PED is equal to 1?

Answer 5

% change in demand is the same as the % change of its price. The demand is called unit elastic. A 15% rise percentage in price would lead to 15% contraction in demand.

Question 6

WHAT if the PED IS GREATER THAN 1(PED > 1) ?

Answer 6

The demand response more than proportionately to a change in price i.e demand is elastic. e.g 20% increase in price leads to 50% drop in demand

Question 7

What are the factors that determine the PED of a product?

Answer 7

• Number of close substitutes available for consumers

-Price of the product in relations to total income

-Cost of substituting between different productss

-degree of luxury
-standard assumption is that necessities have a lower price elasticity of demand whereas luxury are optional spend.