Price elasticity of demand Flashcards
What does price elasticity of demand (PED) measure?
PED measures the degree of responsiveness of the quantity demanded of a good to changes in price.
What is the formula for price elasticity of demand?
Price Elasticity of Demand = (% Change in Quantity Demanded) / (% Change in Price).
What does it mean if PED is greater than 1?
If PED > 1, demand is elastic, meaning quantity demanded changes more than proportionally to price changes.
What does it mean if PED is less than 1?
If PED < 1, demand is inelastic, meaning quantity demanded changes less than proportionally to price changes.
What does it mean if PED equals 1?
If PED = 1, demand is unitary elastic, meaning quantity demanded changes proportionally to price changes.
What is perfectly elastic demand?
Perfectly elastic demand occurs when PED = infinity; any price increase leads to a complete drop in demand.
What is perfectly inelastic demand?
Perfectly inelastic demand occurs when PED = 0; quantity demanded does not change regardless of price changes.
How is PED typically expressed?
PED is always expressed as a positive number, despite the negative relationship between price and quantity demanded.
What factors determine whether demand is elastic or inelastic?
Factors include the availability of substitutes, necessity vs. luxury status of the good, and the proportion of income spent on the good.
How does PED affect pricing strategy?
Businesses use PED to determine the impact of price changes on revenue; elastic goods may reduce revenue with price increases, while inelastic goods may increase it.
What is the significance of unitary elasticity?
Unitary elasticity indicates no revenue change from price adjustments, as the proportional change in demand equals the price change.
Why is PED important in economics?
PED helps businesses and policymakers predict consumer behavior and assess market reactions to price changes.
What is an example of an inelastic good?
An example of an inelastic good is a life-saving medication, where demand changes little regardless of price changes.
What is an example of an elastic good?
An example of an elastic good is a luxury item like designer handbags, where demand changes significantly with price fluctuations.
How does the availability of substitutes affect PED?
Goods with many substitutes tend to have more elastic demand, as consumers can easily switch to alternatives when prices rise.
