Price Elasticity of Demand - Unit 1 Flashcards
What is price elasticity of demand?
The measure of the responsiveness of demand to a change in price
PED formula?
% change in quantity demanded/% change in price
Give seven factors affecting PED:
Luxury/necessity; availability of substitutes; habit forming; brand loyalty; the proportion of income; time
If PED is less than -1:
The demand is price elastic - % change in demand is greater than the % change in price - demand is responsive
What characteristics do price elastic products have?
luxuries, many substitutes, not habit forming, little brand loyalty, a high proportion of income
If PED is more than -1:
Demand is price inelastic - % change in demand is smaller than % change in price - demand not very responsive
What characteristics do price inelastic products have?
Necessities, few substitutes, habit-forming, strong brand loyalty, low proportion of income
If the demand curve is steep what does this indicate?
That the product is price inelastic
If the demand curve is shallow what does this indicate?
That the product is price elastic
Why would a producer want to know their products PED?
To determine their pricing policy and ultimately boost revenue and profit - it also may help with production plans and purchasing
What might a producer with an elastic price product do to boost revenue?
Decrease price because the ultimate boost in sales is greater than the loss in revenue per customer
What might a producer with an inelastic price product do to boost revenue?
Raise the price because the increased revenue per sale is greater than the revenue lost through fall in sales
What two ways could change elasticity?
- Advertising and branding changes
- Mergers and takeovers - reduces substitutes available
