price elasticity of demand Flashcards
chain for ped
ped is %change in Q demanded/%change in P in order to measure how much a quantity demanded will respond to a change in price
with this you can determine what to do with his prices
ped chain negative
whether price goes up or down ped will always be negative because there is almost always one decreasing variable due to the inverse relationship
why get a ped bigger than 1
would happen when top of formula is bigger than the bottom and demand is elastic (consumers are very responsive)
the % change in price will lead to a bigger % change in quantity demanded.
inelastic demand
when ped is between -1 and 0 that means that ped is inelastic and demand is unresponsive to changes in price
the % change in price will lead to a smaller % change in quantity demanded.
ped of just -1
top of our formula is the same size as the bottom
demand is unitary elastic
perfectly inelastic demand curve
price has no effect on quantity demanded
or instance, if the price of life-saving medicine were to skyrocket, a patient in need of the medication to save their life would continue to demand the same quantity of medication because they need it to survive, so they’ll be completely unresponsive to changes in price, suggesting perfectly inelastic demand.
A drug addict hooked on heroine or cocaine, will also continue to demand drugs even if price increases because their addictions will force them to continue buying, which means their demand is unresponsive to changes in price, again suggesting perfectly inelastic demand.
as we get closer to zero demand gets steep and more inelastic till its perfectly inelastic
perfectly elastic demand
completely flat/horizontal if price was to change at all consumers will respond infinitely if price changes & consumers will immediately switch to a cheaper seller
unitary elastic demand
looks like a curve L
quickly tell me the factors affecting price elasticity
naab pt
neccessity
addiction and habit
availability of substitutes
brand loyalty
proportion of income
time period
neccesity or luxury
necessity something we need we are unresponsive to price suggesting inelasticity luxury something we dont need we are responsive suggesting elastic demand
addiction or habbit
addiction/ habit leads to low responsiveness to price due to addiction and inelasticity of demand with habbit consumers cant break habitual behaviour
substitute availability
A substitute is a product which can replace another product
if there a few substitutes consumers are unresponsive to changes in price leading to inelastic demand
however if there are many substitutes consumers are highly responsive causing elastic demand
brand loyalty
how loyal consumers are to a brand or how strong branding is
so strong brand loyalty means inelastic demand and weak brand loyalty suggests elastic demand
proportion of income
if a good takes up a larger portion of your income consumers will b every responsive to price suggesting elastic demand
whereas if you spend a small proprtion of your income on a good a small change in price has less impact suggesting inelasticity
Laptops are more likely to be elastic, because they take up a larger proportion of consumers’ incomes. For instance, if the price of a £500 laptop changed by 10%, that would equate to a £50 change in price, which will have a significant impact on the consumer, so they’ll be very responsive to this change in price, suggesting elastic demand.
Biro pens are more likely to be inelastic, because they take up a smaller proportion of consumers’ incomes. For instance, if the price of a 10p biro pen change by 10%, that would equate to only a 1p change in price, which will have a very little impact on consumers, so they’ll be less responsive to changes in price, suggesting inelastic demand.
time
in short run consumers are not as responsive to change in price making it inelastic due to thing like sudden shock and not enough time to consider all options
however in the long run with more time consumers are more responsive to price changes leading to elastic demand on the basis of subtitutes and other factors
shifts in demand- advertising, fasjion & trends
when something other than price changes our demand curve will shift to the right this is an increase in demand
increase in advertising can do this
trends and fashion can also affect this
population and age structure
If population size were to decrease demand will shift to the left and if it increased it will shift to the right
eg the amount if elderly people will affect the quantity of products they consume eg wheelchairs
or if teenage population increases vidri games increase
seasons
demand can fluctuate depending on the type of good purchased in each season
normal goods
(Food,Clothing,Entertainment
Transportation, Electronics)
inferior goods (Store-brand grocery products, Instant noodles
Certain canned or frozen foods
Low-end clothing, Public transportation)
explain the demand for these goods in tems of income
with normal goods
demand increases when income rises and decreases when incomes falls
inferior goods
demand decreases when incomes rise
demand increases when incomes fall
substitute goods
as price for one good decreases demand for ither good decreases
whereas if price increase demand for other goods increases
complementary goods
if price increases of complementary goods demand for other goods decreases
and if price for complementary goods decreases demand for other goods increases
