Price Elasticity of Demand Flashcards
What does PED stand for
price elasticity of demand
What is the PED
Measures the responsiveness of quantity demanded, given a change in price
What is the equation for PED
Percentage change in quantity demanded / percentage change in price
What is PED always
negative
What is the PED when >1
demand is price elastic
What is the PED when <1
demand is price inelastic
What is PED when 0
demand is perfectly price inelastic
What is PED when ∞
demand is perfectly elastic
What is PED when 1
demand is unit price elastic
When is demand price elastic
> 1
∞ (Perfectly)
1 (unit price)
When is demand price inelastic
<1
0 (perfectly)
What does perfectly inelastic mean
regardless of the price change, quantity demanded wont change
What does it mean when price is inelastic
Quantity demanded goes down but proportionally less than the increase in price
What does it mean when price is elastic
as price goes down, quantity demanded increases but proportionally more than the decrease in price
When price is inelastic what does it look like on a graph
a steep demand curve
When price is perfectly inelastic what does it look like on a graph
a vertical demand curve
When price is elastic what does it look like on a graph
A shallow demand curve
When price is perfectly elastic what does it look like on a graph
a horizontal demand curve
When is demand for a good/service price elasticity or price inelastic
SPLAT
What does SPLAT stand for (PES)
S - substitutes (no.)
P - percentage of income
L - luxury/necessity
A - addictive/habit forming
T - time period
Do luxuries have elastic or inelastic demand
Tend to have elastic demand
Do necessities have elastic or inelastic demand
Tend to have inelastic demand
Do addictive products have elastic or inelastic demand
has inelastic demand
Do habit forming products have elastic or inelastic demand
has inelastic demand
Which time period has inelastic demand
short run
Which time period had elastic demand
long run
when is PED elastic
- not necessary
- has many substitutes
- homogenous - no brand
- customer has longer time span of price change
- accounts for a high proportion of consumers overall spending
- quantity demanded is very responsive to a change in price
when is PED inelastic
- necessary
- differentiated - unique/strong brand
- customer has shorter time span of price change
- habit forming/addictive
- accounts for a low proportion if consumers overall spending
- quantity demanded is not very responsive to change in price
