Price Elasticity of Demand

Question 1

What is the Formula For Price Elasticity of Demand?

Answer 1

% change in the Quantity Demanded / % change in Price

Question 2

What does PED measure?

Answer 2

PED measures how responsive quantity demanded is to changes in price i.e. how much does demand change when we change the price.

Question 3

What are the Rules of PED?

Answer 3

=o - perfectly inelastic
<1 - price inelastic
>1 - price elastic
=1 - unitary elastic
The higher the number the more elastic the demand is.

Question 4

Why is PED always negative?

Answer 4

it represents the inverse relationship between price and demand i.e. if prices rise then demand falls and vice verca. negatrive number shown as (-)

Question 5

What is PED Affected by?

Answer 5

• number of substiutes
• time ( hte longer the time the more elastic)
• how necessicary
• Luxries and wants tend to be price elastic
• % of customers income allocated to the good. higher % = more elastic demand

Question 6

What are the uses for PED?

Answer 6

-helps firms determine the optimum price to change
-helps firms decide if they should increase or decrease the price
-use to calculate the impact of a change in price on revenue

Question 7

What are the limitations of Price Elasticity of Demand?

Answer 7

-values based on estimates
-info becomes outdated
-other factors may shift the demand curve cancelling the QD affect
-Elasticity likely to change over time so only useful for short term