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MICRO ECONOMICS > Price Elasticity Of Demand > Flashcards

Price Elasticity Of Demand Flashcards

1
Q

Price elasticity of demand

A

Measures the responsiveness of quantity demanded given a change in the goods own price

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2
Q

PED calculation

A
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3
Q

Elasticity

A

Is the extent to which buyers and sellers respond to changes in market conditions

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4
Q

PED will normally be negative…

A

Because the demand curve is downwards sloping, I.e there is a negative relationship between price and quantity

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5
Q

Elastic demand

A

Is one in which the change in quantity demanded due to a change in price is large

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6
Q

Inelastic demand

A

Is one in which the change in quantity demanded due to a change in price is small

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7
Q

> 1 (elastic demand)

A

If the value of PED is greater than 1, the demand for the good is elastic

  • Means a percentage change in price will cause a larger change in quantity demanded
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8
Q

PED = infinity

A

Perfectly elastic demand has a PED of infinity and any increase in price means that demand will fall to ZERO.

  • Consumers are willing to buy all they can obtain (at P in diagram), but none at a higher price
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9
Q

0 < PED < 1

A

The value of PED for goods with inelastic demand is between 0 and 1.

  • This means that a percentage change in price will cause a smaller percentage change in quantity demanded
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10
Q

PED = 0

A

Perfectly inelastic demand has a PED of 0 and any change in price will have no effect on the quantity demanded.

  • At any price. The quantity demanded will be the same.
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11
Q

PED
= +/- 1

A

Unit elasticity of demand - a good has unit elasticity if the size of the percentage change in price is equal to the size of the percentage change in quantity demanded.

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12
Q

Determinants of PED

A

BANDITS:
- Brand
- Addictive
- Necessity
- Definition
- Income
- Time
- Substitutes

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13
Q

Inelastic

A

Unresponsive to a change in price

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14
Q

Elastic

A

Responsive to a change in price

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15
Q

Brand

A

The brand image, strong brands like Coca Cola are typically more inelastic

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16
Q

Revenue

A

The money made from selling your product.

= price x quantity

17
Q

Elastic (>-1)- relevance to business

A
  • Price increases = decreases total revenue
  • Price decreases = increases total revenue
18
Q

Unit elastic (-1) - relevance to business

A

Price increase or decrease doesn’t change total revenue

19
Q

Inelastic demand (0-1) - relevance to business

A
  • Price increases = increase in total revenue
  • Price decreases = decrease in total revenue
20
Q

Definition

A

The breadth of definition of the product in question

  • Nuts are broad definition and is inelastic compared to almonds which are more elastic
21
Q

Inelastic vs elastic - diagram

A

MICRO ECONOMICS (21 decks)

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