Price Elasticity Of Demand Flashcards
What is price elasticity of demand?
A measure of the responsiveness of quantity demanded of a product to a change in price
How to measure price elasticity of demand?
percentage change in quantity demanded
percentage change in price
How do you draw an inelastic demand curve?
Draw it.
Basically a downwards slash going the opposite way. (Steep curve)
Draw an elastic demand curve
Not steep-look at notes
Description: line that is mid air
What is the value of PED when it is price inelastic?
Between 0 and -1
What is the value of PED when it is price elastic ?
Less than -1
How to draw a perfectly inelastic demand curve?
PED?
A straight vertical line. PED=0
How to draw a perfectly elastic demand curve?
A straight horizontal line. PED= -infinity
How to draw unitary elasticity of demand.
PED=-1
A sideways smiley face
What are factors that influence price elasticity of demand?
-availability of substitutes-elastic
-proportion of income spent on a product-if small percentage, inelastic. E.g. salt High percentage-elastic e.g. exotic holidays
-nature of the product-addictive-inelastic
-Durability of product- durable-elastic since it is possible to postpone purchases. Nondurable-inelastic e.g. milk and petrol as needs to be replaced regularly
-Length of time under consideration usually takes time for consumers to adjust their expenditure patterns following a price change demand is more price elasticity in the long run than in the short run
-Breadth of definition-broadly defined such as fruit-likely to be price inelastic. However, demand for types of fruit is likely to be more price inelastic.
What is total revenue?
The value of goods sold by a firm and is calculated by multiplying price by quantity sold.
What are the key relationships between price elasticity of demand and total revenue?
+ When demand is inelastic, a price change causes total revenue to change in the same direction.
+ When demand is elastic, a price change causes total revenue to change in the opposite direction.
+ When demand is unit elastic, a price change causes total revenue to remain unchanged
+ When demand is perfectly inelastic, a price change causes total revenue to change in the same direction by the same proportion.
+ When demand is perfectly elastic, a price rise causes total revenue to fall to zero.
What is the significance of PED for firms?
-If firms know that the demand for their product is price inelastic they can increase total revenue by increasing the price.
-If firms know that demand is price inelastic then they can increase total revenue by reducing price e.g. restaurants on certain days have special offers.
What is the significant of PED for consumers?
If demand is price inelastic then firms may raise prices but this would reduce the real incomes of consumers.
What is the significance of PED for the government?
-if the gov wishes to maximise its tax revenue then it will place indirect taxes on those products whose demand is price inelastic e.g. alcohol, petrol or tobacco. -consumers bear most of this tax burden.
-The gov may also tax goods and services whose demand is price elastic so that producers bear a higher proportion of the tax burden.
-this could make the business unprofitable.
