Price elasticity of demand

Question 1

Define PED

Answer 1

The responsiveness of quantity demanded to a change in the price of the product

Question 2

What is the formula for PED

Answer 2

PED = %change in quantity demanded divided by %change in price

Question 3

Why is PED negative

Answer 3

Inverse relationship between price and demand

Question 4

Explain the values that make it elastic or inelastic

Answer 4

If PED = 0, perfectly inelastic
If PED is between 0 and -1, inelastic
If PED = -1, Unitary elasticity
If PED is between -1 and - infinity, elastic
If PED = - infinity, perfectly elastic

Question 5

How are perfectly inelastic, perfectly elastic and unitary elastic shown on a demand curve

Answer 5

P Inelastic = vertical line
P elastic = horizontal line
U elastic = curve where pxq is constant

Question 6

What factors affect the PED

Answer 6

1) any close substitutes
2) Usually goods are more elastic in the long term than short term
3) Luxury or necessity
4) Addictive?

Question 7

What are some evaluative points about PED

Answer 7

1) Inelastic causes bigger change in price (equity)
2) When talking about consequences of supply curve shift, depends on PED

Question 8

How does PED affect the government

Answer 8

If they want to earn more tax revenue they tax inelastic goods

Question 9

How does PED affect firms

Answer 9

Helps them know the price to set goods at

(Raise price when inelastic and lower price when elastic)