price elasticity of demand

Question 1

what does elasticity theory do

Answer 1

Elasticity theory looks at the sensitivity of one variable in relationship to another

Question 2

what does elastic coefficient measure

Answer 2

An elasticity coefficient is the measure of the response of one variable to changes in another variable

Question 3

define Price elasticity of demand

Answer 3

measures the responsiveness of demand to a change in price

Question 4

formula for Price elasticity of demand = PED

PED FORMULA

Answer 4

%Δqd/%Δp = PED

Question 5

What type of elasticity do the following elastic coefficients of ped give

1. PED = 0
2. PED<1
3. PED = 1
4. 1<PED<INFINITY

5.PED = INFINITY +

Answer 5

1. perfectly inelastic
2. price inelastic
3. unitary (constant) elasticity
4. price elastic
5. perfectly elastic

Question 6

explain following terms

Perfectly inelastic

Price inelastic

Unitary (constant) elasticity

Price elastic

Perfectly elastic

Answer 6

Theoretically, the business can charge as high a price as it wants to.

A firm should raise P, D will decrease, BUT total revenue will increase.

Increasing or decreasing price will lead to no change in total revenue.

A firm should lower P, D will increase, BUT total revenue will increase.

Theoretically, if the business increased price above a certain point, D would completely disappear .

Question 7

air draw

perfectly inelastic graph

relativley inelastic

relatively elastic

perfectly elastic

Answer 7

1. straight line through x axis,
2. negative gradient intercepts x axis
3. shallow negative gradient no intercept on any axis
4. intercept y axis, straight line,

Question 8

what happens to total revenue when PED is elastic and when it is inelastic

when rise in prices

Answer 8

elastic = decrease in revenue

inelastic = increase revenue

Question 9

What are the determinants of price elasticity of demand

Answer 9

substitutes
The number and closeness of available substitutes will help to determine PED
If there are no close or lack of available substitutes the product is likely to be very price inelastic and vice versa

Time
In the short run products are likely to be more price inelastic as consumers find it difficult to change their shopping habits
In the long run products are likely to be more price elastic as consumers adjust to changing market conditions

Definition of the market
As we widen the market so PED becomes more inelastic
For example, cigarettes are very price inelastic as there are no close substitutes
However, the demand for specific brands of cigarette will have a higher PED

Question 10

how will demand change when a small change in price

for elastic and inelastic

Answer 10

large change in demand for elastic

small change in demand for inelastic