Price Elasticity of Demand- PED Flashcards
What is price elasticity of demand?
measures the responsiveness of quantity demanded to a change in the price of the good
What is the formula for price elasticity of demand?
% change in QD/ % change in P
(the answer will always be negative due to the Law of Demand, therefore negative is ignored)
What is the formula for % change?
(difference/ original) x 100
What does it mean if a good has a price elastic demand?
a fall in price will result in the quantity demanded of the good (e.g. a KitKat) increasing by proportionally more than the price cut, meaning a fall in price will increase total revenue
What must the PED of a good with price elastic demand be?
greater than 1
What does it mean if a good has a price inelastic demand?
a fall in price will result in the quantity demanded of the good (e.g. petrol) increasing by proportionally less than the price cut, meaning a fall in price will decrease total revenue
What must the PED of a good with price inelastic demand be?
less than 1
What does it mean if the demand for a good is perfectly price inelastic?
when prices fall, due to the quantity demanded not changing, total revenue also falls
What must the PED of a good with perfectly price inelastic demand be?
0
What does it mean if the demand for a good is perfectly price elastic?
demand is infinite at a specific price, so a change in price would eliminate all demand for the product
What does it mean if a good has a unitary price elasticity of demand?
a change in price brings about the same proportionate change in quantity demanded, therefore total revenue will remain the same from a price cut
What must the PED of a good with a unitary price elasticity of demand be?
1
Describe the demand curve if a good has a price elastic demand.
shallow
Describe the demand curve if a good has a price inelastic demand.
steep
Describe the demand curve if a good has a perfectly price inelastic demand.
vertical
