Pricing Flashcards
What is Price Elasticity of Demand?
It is the measure of responsiveness in the level of quantity demanded to a change in price.
What is the formula for calculating Price Elasticity of Demand?
PED = % Change in Quantity Demanded / % Change in Price
When PED > 1 is demand elastic or inelastic?
Elastic
What does elastic demand mean?
A small change in price will cause a proportionally greater change in the quantity demanded.
When PED < 1 , is demand elastic or inelastic?
Inelastic
What does inelastic demand mean?
Changes in price of a product do not create large changes in demand.
What is the formula of the demand function?
P = a - bQ
Explain each of the elements of the demand function: P = a -bQ
P = seling price Q = quantity demanded at that price a = maximum theoretical price (y intercept) b = gradient of demand line*
*where b = change in price / change in quantity
How is inelastic demand shown graphically?
Steeper demand curve
How is elastic demand shown graphically?
Shallower demand curve
What is the optimal price?
The level of output at which profit is maximised.
What is the formula to derive the optimal price / profit maximisation?
Marginal Revenue = Marginal Cost
At which point is revenue maximised?
Where Marginal Revenue = 0
What is the formula for marginal revenue?
MR = a - 2bQ
What is the gradient of the Total Revenue line also known as?
Marginal Revenue