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Economics -- 1.2 Elasticity > price elasticity of demand (PED) > Flashcards

price elasticity of demand (PED) Flashcards

1
Q

What is the relationship between price and quantity demanded?

A

According to the law of demand, there is a negative relationship: the higher the price, the lower the quantity demanded, and vice versa, all other things equal

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2
Q

What is price elasticity of demand (PED)?

A

A measure of the responsiveness of the quantity of a good demanded to changes in its price

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3
Q

How is PED calculated?

A

Along a given demand curve

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4
Q

What happens to the PED of a good if there is a large responsiveness of quantity demanded?

A

Demand is referred to as being price elastic

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5
Q

What happens to the PED of a good if there is a small responsiveness of quantity demanded?

A

Demand is referred to as being price inelastic

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6
Q

What formula is used to calculate PED?

A

PED = % change in Qd / % change in P

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7
Q

How is percentage change in quantity demanded calculated?

A

(change in Qd / Qd) x 100

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8
Q

How is percentage change in price calculated?

A

(change in P / P) x 100

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9
Q

Why is the PED value treated as if it were positive, although its mathematical value is usually negative?

A

To avoid confusion when making comparisons between different values of PED (e.g. a PED of 3 is larger than a PED of 2, but with minuses -2 is bigger than -3)

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10
Q

Why is the PED always a negative number?

A

Because price and quantity demanded are negatively (indirectly) related

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11
Q

Why is elasticity measured in terms of percentages?

A
  1. There needs to be a measure of responsiveness that is independent of units (makes it possible to compare responsiveness for different goods and across countries)
  2. It is meaningless to think of changes prices or quantities in absolute terms because it says nothing about the relative size of change (puts responsiveness into perspective)
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12
Q

How else can the PED be calculated (by use of the ‘midpoint formula’)?

A

PED = (change in Qd / average Qd) / (change in P / average P)

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13
Q

What does the value of PED involve?

A

A comparison of two numbers (the % change in quantity demanded [numerator] and % change in price [denominator])

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14
Q

When 0 < PED < 1, what is demand classified as being?

A

Price inelastic

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15
Q

When 1 < PED < ∞, what is demand classified as being?

A

Price elastic

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16
Q

How can the value 0 < PED < 1 occur?

A

% change in quantity demanded is smaller than the % change in price

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17
Q

How can the value 1 < PED < ∞ occur?

A

% change in quantity demanded is larger than the % change in price

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18
Q

What is the interpretation of 0 < PED < 1 (inelastic demand)?

A

Quantity demanded is relatively unresponsive to price

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19
Q

What is the interpretation of 1 < PED < ∞ (inelastic demand)?

A

Quantity demanded is relatively responsive to price

20
Q

When PED = 1, what is demand classified as being?

A

Unit elastic

21
Q

When PED = 0, what is demand classified as being?

A

Perfectly inelastic

22
Q

When PED = ∞, what is demand classified as being?

A

Perfectly elastic

23
Q

How can the value PED = 1 occur?

A

% change in quantity demanded is equal to the % change in price

24
Q

How can the value PED = 0 occur?

A

% change in quantity demanded is zero; there is no change in quantity demanded no matter what happens to the price

25
Q

How can the value PED = ∞ occur?

A

When a change in price results in an infinitely large response in quantity demanded

26
Q

What is the interpretation of PED = 1 (unit elastic demand)?

A

Percentage change in quantity demanded equals percentage change in price

27
Q

What is the interpretation of PED = 0 (perfectly inelastic demand)?

A

Quantity demanded is completely unresponsive to price

28
Q

What is the interpretation of PED = ∞ (unit elastic demand)?

A

Quantity demanded is infinitely responsive to price

29
Q

What is the shape of the demand curve for 0 < PED < 1 (price inelastic demand)?

A

Steeper sloped straight line (big price change causes small quantity demanded change)

30
Q

What is the shape of the demand curve for 1 < PED < ∞ (price elastic demand)?

A

Gentler sloped straight line (small price change causes big quantity demanded change)

31
Q

What is the shape of the demand curve for PED = 1 (unit elastic demand)?

A

Positive quadrant of reciprocal graph [y = 1 / x] (price change is the same as quantity demanded change)

32
Q

What is the shape of the demand curve for PED = 0 (perfectly inelastic demand)?

A

Vertical straight line at a given quantity (no matter the change in price, quantity demanded stays constant)

33
Q

What is the shape of the demand curve for PED = ∞ (perfectly elastic demand)?

A

Horizontal straight line at a given price (price does not change, but quantity demanded always will)

34
Q

What is the range of the numerical value of PED?

A

Zero to infinity

35
Q

In general, what effect does a large value of PED have?

A

The greater the responsiveness of quantity demanded

36
Q

What is the PED value for most goods and services?

A

Greater than zero and less than infinity, and other than exactly one

37
Q

Why do the three special cases of PED exist?

A

The cases of unit elastic, perfectly inelastic and perfectly elastic demand are rarely encountered in practice, but they have important applications in economic theory

38
Q

Why does the value of PED vary?

A
  • when price is low and quantity demanded is high, demand is inelastic (0 < PED < 1) because % change in Qd is relatively small and % change in P is relatively large
  • when price is high and quantity demanded is low, demand is elastic (1 < PED < ∞) because % change in Qd is relatively large and % change in P is relatively small
39
Q

How does the number of substitutes effect the elasticity of a good or service?

A

The more substitutes a good or service has, the more elastic is its demand

40
Q

If the price of a good with many substitutes increases, what will happen?

A

Consumers can switch to other substitute products, therefore resulting in a relatively large drop (large responsiveness) in quantity demanded

41
Q

If the price of a good or service with few or no substitutes increases, what will happen?

A

It will bring forth a small drop in quantity demanded

42
Q

How does the closeness of substitutes effect the elasticity of a good or service?

A

The greater the responsiveness of quantity demanded to a change in the price of the substitute, the greater the PED (demand elastic)

43
Q

How are goods or services with closer substitutes available referred to as having?

A

They are said to have a greater substitutability

44
Q

Why is the PED higher if two goods or services are close substitutes to one another?

A

Because it is easier for the consumer to switch from one product to the other

45
Q

What is a factor that affects the number of substitutes a good has?

A

Whether the good is defined broadly or narrowly (involves how goods are defined in relation to each other)

Economics -- 1.2 Elasticity (5 decks)

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