Price Elasticity of Demand

Question 1

What is Elasticity?

Answer 1

Measures responsiveness of demand to a change in a relevant variable - such as price or income.

Question 2

Definition of Price Elasticity of Demand

Answer 2

Measures extent to which quantity of product demanded changes in response to change in price.

Question 3

Price Elasticity of Demand (PED) =

Answer 3

% Change in Price

Question 4

Price elastic more than 1 means

Answer 4

Change in demand is more than change in price.

Question 5

Price inelastic less than 1 means

Answer 5

Change in demand is less than change in price.

Question 6

Unitary price elasticity being exactly 1 means

Answer 6

Change in demand = Change in price

Question 7

if PED > 1 (price elastic) then

Answer 7

Change in price will cause larger change in demand

• Overall revenues increase with price cut
• Overall revenues fall with price increase

Question 8

5 factors influencing PED:

Answer 8

1) Brand strength
2) Necessity
3) Habit
4) Availability of substitutes
5) Time

Question 9

1) Brand strength on PED

Answer 9

Products with strong brand loyalty and reputation tend to be price inelastic.

Question 10

2) Necessity on PED

Answer 10

More necessary a product, more demand tends to be inelastic.

Question 11

3) Habit on PED

Answer 11

Products that are demanded and consumed as matter of habit tend to be price inelastic.

Question 12

4) Availability of substitutes on PED

Answer 12

Demand for products that have lots of alternatives tends to be price elastic.

Question 13

5) Time on PED

Answer 13

Price changes tend to have less impact on demand than over longer periods.