Price Elasticity of Demand (CH 6)

Question 1

Define Price elasticity of demand?

Answer 1

Responsiveness of change in demand to a change in price

Question 2

PED formula

Answer 2

% Change in Quantity Demanded / % Change in Price

Question 3

What’s the responsiveness like with price elastic goods?

Answer 3

Demand that’s very responsive to a change in price.

(Price change leads to big change in demand)

Question 4

What’s the responsiveness like with price inelastic goods?

Answer 4

Demand that’s relatively unresponsive to change in price

Question 5

What demand does perfectly inelastic goods have?

Answer 5

Has demand that doesn’t change when price changes

PED = 0

Question 6

What demand to perfectly elastic goods have?

Answer 6

Demand that falls to zero when price changes

PED = Infinity

Question 7

If price of bread increased by 20% and quantity demanded decreased by 15%, what is the PED of bread?

Answer 7

-15% / 20% = -0.75

Therefore bread is priced inelastic

Question 8

What effect can firms have on prices if it has inelastic demand?

Answer 8

Firms can raise it’s prices which would decrease quantity sold which would reduce total revenue.