Price Elasticity of Demand (PED) Flashcards
what happens when there is an increase in price?
there will be a fall in the quantity demanded
what happens when there is a fall in price?
there will be a increase in quantity demanded
what is price elasticity of demand?
a metric that calculates how responsive quantity demanded is to a change in price (elastic or inelastic)
what does the price elasticity of demand help us to calculate?
how responsive the change in quantity demanded will be to a change in price
is the PED value always positive or negative?
negative
how can you calculate PED?
%change in quantity demanded / % change in price
how do you calculate percentage change?
((new value -old value) / old value) x 100
what does to numerical value of PED indicate?
the responsiveness of a change in quantity demanded to a change in price
why is PED always negative?
due to the inverse relationship between pice and quantity
how is an elastic product shown?
> 1
how is an inelastic product shown?
between 0 & 1
what are some examples of elastic products?
luxury products like cars and smart watches
why are luxury product more likely to be elastic?
they are not essential items people need in day-to-day life meaning they will stop purchasing when there is a rise in price
what are some examples of inelastic products?
necessities such as bread, milk and eggs
what are necessities more likely to be inelastic?
because consumers still purchase these products even if prises rise because they are essential for daily living
what are some factors that affect PED?
availability of substitutes, brand loyalty, time, luxury or necessity?, proportion of income spent
what is the aim of advertising and marketing expenditure?
to shift the demand curve to the right and make the demand more price inelastic
when will PED be more price inelastic (lower)?
for goods that have fewer substitutes
when will demand be more price inelastic?
when there is a smaller proportion of income we spend on a product
what will a long time period under consideration mean for a good or service?
it will be more price elastic as consumers have longer to search for substitutes
what will a short time period under consideration mean for a good or service?
it will be more price inelastic as consumers wont need to search for a substitute
what is PED significant to a business?
it enables them to adjust their pricing strategy to maximise their revenue
what should a business do if their product is price inelastic?
rise the price leading to higher total revenue
what is a price skimming strategy?
the selling price is initially set as high as possible and then gradually lowered over time
