Price Elasticity of Demand

Question 1

Elasticity

Answer 1

A numerical measure of responsiveness of one variable following a change in another variable, ceteris paribus or other things equal.

Question 2

Price Elasticity of Demand

Answer 2

Measures of the responsiveness of the quantity demanded for a product following a change in the price of the product.

Question 3

Price Elastic

Answer 3

When the relative change in the quantity demanded of the good is greater than the change in price of the product

Question 4

Price Inelastic

Answer 4

When the relative change in the quantity demanded of the good is less than the change in the price of the product

Question 5

Perfectly inelastic

Answer 5

Where a change in price has no effect on the quantity demanded

Question 6

Perfectly elastic

Answer 6

where all that is produced is sold at the given price

Question 7

unit elasticity

Answer 7

where the change in price is relatively the same as the change in quantity demanded.PED is equal to 1

Question 8

Factors affecting price elasticity of demand

Answer 8

Availability and attractiveness of substitutes
Relative expense of the product
The time period such as short run or long run

Question 9

Income Elasticity of Demand

Answer 9

measures the responsiveness of quantity demanded following a change in income
income elastic: YED>1
income inelastic: YED<1

Question 10

The classification of YED goods in relation to income

Answer 10

Normal goods is one where the demand increases as income increases. YED is between 0 and 1
Inferior goods is one where the quantity demanded decreases as income increases or increases as income falls. YED is negative
Necessity goods is a type of normal good for which demand doesn’t change much regardless of income change. YED is positive but likely to be zero.
Superior or Luxury good has a positive YED that is greater than 1 and is a normal good where the quantity demanded is responsive to changes in income.

Question 11

Cross Elasticity of Demand

Answer 11

Measures the responsiveness of the quantity demanded for one product in response to a change in price in another product.

Question 12

Types of XED

Answer 12

When the XED is greater than 1, the quantity demanded has a greater shift in response to the price change of the other product.
When the XED is less than 1, the quantity demanded doesn’t shift as much compared to the response to the price change of the product.
When the XED is positive, it means that the two goods are substitutes.
When the XED is negative, it means that the two goods are complements or jointly demanded.
An XED of 0 indicates that there is no particular relationship between two products.

Question 13

What is PED used for in business?

Answer 13

It is used to explain
Price variations in a market
The impact of changing prices on consumer expenditure and sales revenue.
The effects of changes in indirect taxes on government income.

Question 14

Relationship between PED and total expenditure on a product

Answer 14

If Product is demand inelastic, The firm focuses on increasing the price in order to increase its revenue.
If product is demand elastic, The firm focuses on decreasing the price, so they gain more demand and make more revenue as a result.

Question 15

How do firms focus on making a product more price inelastic?

Answer 15

Persuasive advertising: A firm highlights the benefits of this products compared to its substitutes. It results in a shift to the right of the demand curve.
Creating a brand image: Increase brand loyalty, therefore demand will be present regardless of price change.
Taking over or merging with competitors to increase market share, and therefore control over a market.
A firm creates a monopoly product where a firm is the only producer of the product which is protected by a patent or regulations.

Question 15

How does YED allow businesses to make decisions?

Answer 15

It helps forecast the future demand for a whole range of consumer goods and services. In emerging markets such as China and India, as incomes increase, people will demand more cars. Therefore, there might be demand for brands to build a budget vehicle. As a result, they will build facilities to produce such products.
If YED for a normal good is greater than 1, then demand will be expected to grow more quickly than consumer incomes. This is usually the case in times of sustained economic growth such as that experienced by India, China and Vietnam.
If YED is negative, in the case of inferior goods, firms that produce these can expect their sales to decline when the economy is doing well; at a time of recession, though, demand for their product is likely to increase.

Question 16

How does XED help businesses make decisions?

Answer 16

Many firms are concerned about the impact that competitors’ pricing strategies will have on the demand for their own products. Remember that substitutes are characterized by a positive XED; the higher the price, the more likely it is that consumers will buy a cheaper substitutes. In such cases, there is a high degree of interdependence between suppliers and the dangers of a competitor cutting its price are likely to be significant.

The size of XED is important. If a firm has an XED of 1.5 with another related product. This indicates that a 10% decrease in price is lilely to cause a 15% decrease in the quantity demanded of its own product.

XED helps identify the products that are most complementary since firms are not just looking for consumers to buy one of their products but rather a group of them.