Price Elasticity of Demand (PED)

Question 1

define price elasticity of demand

Answer 1

measures the responsiveness of quantity demanded for a product to a change in price.

Formula: % change in quantity demanded / % change in price

Question 2

what does inelastic mean

Answer 2

elastic means that when the price goes up, consumers’ buying habits stay about the same, and when the price goes down, consumers’ buying habits also remain unchanged

Question 3

what does elastic mean?

Answer 3

the quantity demand of the product changes more than proportionally when its price increases or decreases

Question 4

example of an inelastic product/service

Answer 4

tobacco

Question 5

example of elastic product/service

Answer 5

soft drinks

Question 6

factors affecting PED

Answer 6

• nature or type of good
• substitutes
• price level
• income levels
• time period (The Business Cycle)

Question 7

What does a value above 1 mean when calculating PED?

Answer 7

elastic

Question 8

what does a value below 1 mean?

Answer 8

inelastic

Question 9

what does a value of 1 mean?

Answer 9

unit elastic

Question 10

what does a value of 0 mean?

Answer 10

perfectly inelastic

Question 11

what can data of PED be used for?

Answer 11

helps the firm decide whether to raise or lower price, or whether to price discriminate

Question 12

2 strategies to reduce PED

Answer 12

• customer loyalty

- increase brand awareness