Price of elasticity demand

Question 1

Price elasticity of demand (PED)

Answer 1

-The responsiveness of the quantity demand to changes in price (How will the quantity demanded change if there is a change in price)

Question 2

Elastic Demand

Answer 2

-If a small change in price causes a big change in quantity demanded

Question 3

Goods that have elastic demand:

Answer 3

• Lower price will increase Total Revenue

- Higher price will decrease Total Revenue

Question 4

The formula for calculating change in price is:

Answer 4

change or gap in price/original price × 100

PED = % change in quantity demand/% change in price

Question 5

Inelastic demand

Answer 5

-If a small change in price causes a smaller change in quantity demanded (price change has a small influence on quantity demanded)

Question 6

Goods that have an inelastic demand:

Answer 6

• higher price will increase Total Revenue (people will still buy the same quantity even if price is high, e.g. salt, alcohol.)
• lower price will decrease Total Revenue

Question 7

Factors affected price elasticity of demand

Answer 7

1. The availability of substitutes
2. Share of household income spent on the product
3. Habit-forming goods
4. Whether it is a luxury or a necessity.

Question 8

PRICE ELASTICITY OF SUPPLY (PES)

Answer 8

-The responsiveness of the quantity supplied to a change in price. (How will the quantity supplied change if there is a change in price)

Question 9

Elastic supply

Answer 9

-If a small change in price causes a big change in the quantity supplied.

Question 10

Formula to calculate PES

Answer 10

change between the quantity supplied/original quantity supplied X 100.

Question 11

Inelastic supply

Answer 11

-If a small change in price causes a smaller change in quantity supplied.
(Price change has a small influence on the quantity supplied)

Question 12

Advertising

Answer 12

-Advertising is informing and persuading potential customers to buy a product.

Question 13

Purpose of advertising

Answer 13

increase the demand for a good or a service

Question 14

Advantages of advertising:

Answer 14

• Consumers can compare products before buying
• Increase in the demand and sales of products and services
• Advertisers pay sponsorships for sport teams, etc.

Question 15

Disadvantages of advertising:

Answer 15

-Advertising is expensive
-Can mislead consumers
-Harmful (demerit) goods can be advertised, e.g. cigarettes and alcohol
May lead to dissatisfaction, consumers may get upset because they cannot afford the advertised
goods and services

Question 16

Methods of advertising:

Answer 16

Cinema
-Reaches people who are watching the film and therefore only reaches a limited amount of people using sound and visual

Trade Fairs/Exhibitions
-Popular form of advertising products of a particular industry

Question 17

Does advertising raise costs?

Answer 17

Does advertising raise costs?
No:
If the advertising leads to an increase in demand (sales), the average advertising cost will decrease over the long term.

Yes:
If advertising does not lead to an increase in demand (sales), advertising costs will decrease the profit of a firm.

Question 18

Pricing polices

Answer 18

Price discrimination

-charge different prices for different: market segments/hours

Question 19

Pricing polices

Answer 19

Price skimming

-charge a higher price for a new product on the market

Question 20

Pricing policies

Answer 20

Penetration pricing
-Initial price lower than those of existing competitors to get into market
many competitors in market

Question 21

Pricing policies

Answer 21

Destroyer pricing

-charge very low to drive competitors out of market

Question 22

Pricing policies

Answer 22

Competition-based pricing

-prices set in line with competitor to obtain and maintain market share

Question 23

Pricing policies

Answer 23

Perceived value pricing
-based on consumers perception
(high price for quality goods)
(low price for “value for money” goods

Question 24

Market

Answer 24

anywhere where the exchange of buying and selling of goods and services takes place for money

Question 25

Types of Market structures

Answer 25

Perfect competition
Monopoly market
Monopolistic competition

Question 26

Types of barries

Answer 26

capital barries
distribution barriers
market barriers