Price elasticity of demand (PED)

Question 1

What is price elasticity of demand?

Answer 1

The responsiveness of a change in demand to a change in price

Question 2

What is the formula for price elasticity of demand?

Answer 2

% change in quantity demanded/ % change in price

Question 3

What is price inelastic good?

Answer 3

One that has a demand that is relatively unresponsive to a change in price.

Question 4

What is a unitary elastic good?

Answer 4

One that has a change in demand equal to the change in demand

Question 5

What is a price inelastic good?

Answer 5

One that sees no change in demand when price changes

Question 6

What is a perfectly elastic good?

Answer 6

One where demand falls to zero if the price changes; PED = infinity

Question 7

List the six factors affecting price elasticity of demand

Answer 7

• Necessity
• Substitutes and complements
• Addictiveness or habitual consumption
• Proportion of income spent on the good
• Durability of the good
• Peak and off-peak demand

Question 8

How does necessity affect PED?

Answer 8

A necassary good will have relatively inelastic demand, while luxury goods will be more elastic

Question 9

How do the existence of substitutes affect PED?

Answer 9

If a good has several substitutes, the demand is more price elastic. Elasticity can change within markets as new products are developed. The closer and more available the substitutes are, the more elastic the demand

Question 10

How does the proportion of income that is spent on a good impact its PED?

Answer 10

If a good takes up a small amount of income demand is likely to be relatively price inelastic. Whereas if a good takes up a large proportion of income, demand is likely to be pretty price elastic

Question 11

How does the durability of a good impact its PED?

Answer 11

Long lasting goods have more elastic demand because consumers wait to buy another one

Question 12

How does peak and off peak demand impact PED?

Answer 12

During peak times, demand is more price inelastic

Question 13

What would be the impact of increasing the price of an inelastic good?

Answer 13

The quantity sold will not fall significantly, and therefore revenue will increase

Question 14

What would be the impact of raising the price of an elastic good?

Answer 14

The quantity sold will fall, reducing total revenue

Question 15

Describe how a price elastic good operates

Answer 15

A price change will mean a bigger change in the quantity demanded

Question 16

Describe how a unitary price elastic good operates

Answer 16

A price change will lead to a proportional change to the quantity demanded

Question 17

Describe how a price inelastic good operates

Answer 17

A price change causes a smaller change in the quantity demanded

Question 18

What is the numerical value of a price elastic good?

Answer 18

Less than -1

Question 19

What is the numerical value of a unitary price elastic good?

Answer 19

-1

Question 20

What is the numerical value of a price inelastic good?

Answer 20

Between -1 and 0

Question 21

How can we determine whether a good is price elastic?

Answer 21

% change in Q will be greater than the % change in P

Question 22

How can we determine whether a good is unitary price elastic?

Answer 22

The % change in Q = the % in P

Question 23

How can we determine whether a good is price inelastic?

Answer 23

The % change in Q will be less than the % change in P

Question 24

What does PED measure?

Answer 24

The responsiveness of demand after a change in the good’s own price

Question 25

How can substitution impact PED?

Answer 25

If substitution costs are high, demand will tend to be price inelastic