Price Elasticity Of Demand

Question 1

What is PED?

Answer 1

• PED measures responsiveness of demand for a product following change in price
• percentage change in quantity demanded/percentage change in price

Question 2

How do we calculate percentage change?

Answer 2

Difference/original x100

• so PED x change in price = change in demand
• change in demand/PED = change in price

Question 3

What does a change in price usually lead to?

Answer 3

With PED both positive and negative values are the same

• rise in price will usually lead to a fall in demand
• fall in price usually leads to rise in demand
• what PED shows is how much it will rise or fall

Question 4

What is the PED coefficient

Answer 4

• if PED = 0 demand is perfectly inelastic, meaning demand doesn’t change when price does
• if PED = 0-1, demand is inelastic
• if PED = 1, demand is unit elastic
• if PED > 1, demand responds more proportionately to change in price, demand is elastic

Question 5

How can businesses use PED?

Answer 5

• if PED is known the effect of demand when price changes can be calculated
• business can decide on Changing the price or not
• business can therefore use PED to work how it’s revenue will change if it decides to change its price

Question 6

What happens to revenue when PED is at certain amounts?

Answer 6

-PED is inelastic and price is lowered 
•revenue decreases 
-PED is inelastic and a firm raises its price 
•total revenue increases 
-PED is elastic and a from lowers its price 
•revenue increases 
-PED is elastic and price is raised 
•revenue decreases

Question 7

What if PED is inelastic?

Answer 7

• business should aim to make products price inelastic

- means they can raise price and increases revenue, sacrificing a few sales

Question 8

How does consumers income affect PED?

Answer 8

• goods and services take up a high proportion of households income
• more elastic demand and products at a small price change will make a big difference

Question 9

How does Brand Loyalty effect PED?

Answer 9

-when they’re loyal consumer is less worried about price(inelastic) as the are loyal and will pay more

Question 10

How does the fact the product is addicting affect PED?

Answer 10

-price is inelastic for cigs and alcohol as they are addicted and will pay no matter what

Question 11

What does how neccesary the product is do to PED?

Answer 11

• price will be inelastic if it’s a necessity

- luxuries are elastic as if the go up people may chose to not purchase

Question 12

How does the time period following a change in price affect PED?

Answer 12

-demand becomes more price elastic the longer the consumers are allowed to respond to the change

Question 13

How does the amount of close substitutes affect PED?

Answer 13

-more there are the more elastic demand is as if price goes too high they have other, cheaper options

Question 14

What is PLANTS?

Answer 14

Percentage of income
Loyalty of customers 
Addiction 
Necessity of luxury 
Time period of changing 
Substitutes

Question 15

What are other effects on PED?

Answer 15

• cost of switching between products, maybe be expensive to change product (contracts) / so it’s inelastic
• peak and off peak of demand, demand is inelastic at peak times and more elastic at off peak
• breadth of definition of good or service, if a good is broadly defined like demand for petrol or meat demand is inelastic, specific brands of pet are likely to be more elastic tho

Question 16

How can a business respond to PED?

Answer 16

• make product different to competitors, keeps brand loyalty
• take over competition, no subs for customers
• make price changes over a short period of time so they don’t notice
• tie customers into contacts or trade agreements
• be affordable
• sell a necessity or make customers perceive the product that way