Price Elasticity Of Demand Flashcards
What is price elasticity of demand?
It’s responsiveness of demand to a change in price.
Formula for PED
percentage change in quantity demanded by percentage change in price
Default answer for PED
always come out in negative (-) value
How many types are there in PED results?
5 (Elastic, Inelastic, Unitary Elasticity, Perfectly Elastic, Perfectly Inelastic)
What is the situation of elastic PED?
Where PED > 1, % change in quantity demand is higher than % change in price, curve => shallow downward curve from left to right where the gap between demand points is larger than the gap with price points
What is the situation of inelastic PED?
Where PED < 1, % change in quantity demand is lower than % change in price, curve => steep downward slope from left to right where the gap between price points is larger than the gap with demand points
What is the situation of unitary elasticity?
Where PED = -1, % change in quantity demand equal to % change in price, curve => normal slope curve from left to right where gaps between both price and demand are equal
What is the situation of perfectly elasticity?
Where PED = infinity, price changes means demand changes completely and if there was increase in price then demand will be zero, horizontal demand curve with one price
What is the situation of perfectly inelasticity?
Where PED = 0, no matter how price changes it doesn’t change the demand, vertical demand curve with given price points connecting the line
How does availability of substitutes affect PED?
For buyers
If product/service has many substitutes => elastic
If product/service has little or no substitutes => inelastic
How does degree of necessity affect PED?
If the goods are essential => inelastic
If the goods aren’t essential => elastic
If the buyer got consumption habit, the goods become essential => inelastic
How does amount of income spent affect PED?
If large amount of income spent on goods/service => elastic
If small amount of income spent on goods/service => inelastic
How does time affect PED?
If price rises,
short term => inelastic (taking time to find a new substitute which is cheaper)
long term => elastic (already found, demand will decrease and go to cheaper found substitute)
Total Revenue formula
Total Revenue = Price x Quantity
Tell how increase or decrease of revenue works with PED elastic products
If increase price, demand falls => total revenue decrease
If decrase price, demand rises => total revenue increase
