Price Elasticity of Demand and Supply

Question 1

What is Price Elasticity of Demand (PED)?

Answer 1

It measures the responsiveness of quantity demanded given a change in price.

Question 2

How do you work out PED?

Answer 2

PED = %ΔQD/ %ΔP - Where QD = Quantity Demanded and P = Price

Question 3

How do you work out the %Δ?

Answer 3

%Δ = Difference/Original x 100

Question 4

How do you know whether demand is elastic or inelastic?

Answer 4

PED>1 = Demand is price elastic
PED<1 = Demand is price inelastic
PED = 0 - Demand is perfectly price inelastic
PED = 1 - Demand is unit price elastic

Question 5

What happens to Total Revenue (TR) when Demand is Price Elastic?

Answer 5

Demand is Price Elastic:
1) If price increases, TR decreases
2) If price decreases, TR increases

Question 6

What happens to Total Revenue (TR) when Demand is Price Inelastic?

Answer 6

Demand is Price Inelastic:
1) If price increases, TR increases
2) If price decreases, TR decreases

Question 7

What is the Acronym to remember what happens to Total Revenue?

Answer 7

EOIS:
Elastic
Opposite
Inelastic
Same