Price Elasticity of Demand-PED(1.2.4)

Question 1

What is PED?

Answer 1

measures the responsiveness of the quantity demanded of a good or service as it changes in price

Question 2

What is price elastic?

Answer 2

the products have a large percentage change in demand for a small percentage of price

Question 3

What is price inelastic?

Answer 3

the products have a small percentage change in demand for a small percentage of price

Question 4

PED calculation

Answer 4

% change in price

Question 5

Percentage change calculation

Answer 5

old value

Question 6

What does >1 PED mean?

Answer 6

price elastic
demand is more responsive to a change in price
e.g. luxury products, cars, jewellery, smart watch, branded goods

Question 7

What does between 1 and 0 PED mean?

Answer 7

price inelastic
demand is less responsive to a change in price
e.g. necessities, milk, toothpaste, fuel, addictive products, cigarettes

Question 8

Five factors that influence PED

Answer 8

availability of substitutes
brand loyalty
proportion of income spent
time
luxury or necessity

Question 8

Availability of substitutes

Answer 8

PED will be more price inelastic
e.g. petrol has less substitutes and so is more price inelastic than chocolate bars which have many substitutes

Question 9

Brand loyaloty

Answer 9

the purpose of marketing expense is to shift the demand curve to the right
this makes the product more price inelastic
e.g. Coca-Cola consumers are more brand loyal to their brand and will not buy Pepsi despite the similar tastes

Question 10

Luxury or necessity

Answer 10

necessities are price inelastic
e.g. milk is a necessity so it is inelastic as people will always need it so there will always be demand

luxuries are price elastic
e.g. smoked salmon is price elastic as demand will change depending on price

Question 11

Proportion of income spent

Answer 11

if a product we acquire takers up a small proportion of our income the more inelastic the demand will be
e.g. a small amount of income spent on salt means demand for salt will be inelastic but buying a new car or smartwatch means a large amount of income spent meaning there will be more price elastic demand

Question 12

Time

Answer 12

the longer the time period under consideration (by the customer) the more price elastic the product will likely be
the shorter the time period under consideration (by the customer) the more price inelastic the product will likely be

Question 13

Significance of PED to a business

Answer 13

can help maximise potential revenue
if demand for products is price inelastic raising prices will lead to an increase in total revenue and lowering pricing would mean a fall in revenue
if demand for products is price elastic raising the prices will result in a decrease of total revenue and lowering prices would lead to an increase in revenue

Question 14

Elastic demand graph

Answer 14

Question 15

Inelastic demand graph

Answer 15