Price elasticity of demand

Question 1

What is price elasticity of demand?

Answer 1

It is a measurement used to measure the responsiveness of quantity demanded given a change in price.

Question 2

What does the law of demand say about PED?

Answer 2

PED is always negative

Question 3

What is the equation for PED?

Answer 3

Percentage change in quantity demanded / Percentage change in price

Question 4

What does PED > 1 mean?

Answer 4

Demand is elastic

Question 5

What does PED < 1 mean?

Answer 5

Demand is inelastice

Question 6

What does PED = 0 mean?

Answer 6

Demand is perfectly price inelastic

Question 7

What does PED = ∞ mean?

Answer 7

Demand is perfectly price elastic

Question 8

What does PED = 1 mean?

Answer 8

Demand is unit price elastic

Question 9

What does it mean by price inelastic?

Answer 9

The price of a good increase / decrease proportionally more than the quantity demanded. The percentage change in price is always larger than the percentage change in quantity demanded. A large price change will causes a small change in quantity demanded.

Question 10

What does it mean by price elastic?

Answer 10

The quantity demanded for a good decreases / increases proportionally more than the price. The percentage change in quantity demanded is always larger than the percentage change in price. A small price change will cause a much large change in quantity demanded.

Question 11

How do you measure price elasticity?

Answer 11

Remember SPLAT:

Substitutes : The more substitutes the more price elastic demand will be.
Percentage of income : The greater the percentage of income that a price change takes, the more price elastic demand will be.
Luxury or Necessity : Luxuries have a more price elastic demand.
Addictive : The more addictive goods / services have a more price inelastic demand.
Time Period : Shorter time periods are more price inelastic.