Price elasticity of demand and its factors

Question 1

When is the PED inelastic

Answer 1

When the PED is less than 1, the firm can raise prices and still increase revenue

Question 2

When is the PED elastic

Answer 2

When the PED is greater than 1, the firm cannot increase revenue by raising prices

Question 3

What are the PED factors

Answer 3

degree of necessity, availability of substitutes, proportion of income, time

Question 4

Degree of necessity

Answer 4

Needs such as food and water make the demand inelastic

Luxury items such as cars, holidays are elastic

Question 5

Availability of substitutes

Answer 5

If there substitutes are many substitutes, the PED will be elastic, however if there are minimal substitutes, the PED will be inelastic

Question 6

Proportion of income

Answer 6

When the proportion of disposable income spent on an item is high (e.g. house) then the PED will be more elastic

If the product purchase is an exceedingly small proportion of total disposable income, the PED will be more inelastic

Question 7

Time

Answer 7

In the long term people can make changes which will make the product more elastic,

in the short term people are less likely to change their behaviour, making it inelastic

Question 8

How does addictiveness effect the PED

Answer 8

the more addictive a product, the more inelastic it is