T7 Price Elasticity Demad

Question 1

What is price elasticity of demand?

Answer 1

Price elasticity of demand measures the extend to which quantity if a product demanded is affected by a change in price.

Question 2

What is a price elastic demand curve?

Answer 2

In the price elastic demand curve there is a greater change in quantity demand when raising the price slightly.

Question 3

What is an inelastic demand curve?

Answer 3

In the inelastic demand curve there is less of a change in the quantity demanded when the price was increased

Question 4

How do you calculate P.E.D?

Answer 4

P.E.D = %change in quantity demanded/ %change in price

Question 5

What are interpretations of P.E.D?

Answer 5

If the P.E.D is less than 1 demand is said to be inelastic
If the P.E.D is greater than 1 it is said to be elastic

Question 6

Factors influencing P.E.D

Answer 6

Brand strength - strong brand loyalty and reputation tend to be price inelastic.(people often pay 50% more to buy a branded product)
Necessity - tends to be inelastic
Availability of substitutes - demand for products that have lots of alternatives tends to be price elastic

Question 7

what is income elasticity of demand?

Answer 7

Income elasticity of demand measures the extend to which the quantity of a product demanded is affected by a change in income

Question 8

How do you calculate I.E.D?

Answer 8

I.E.D= %change in quantity demanded/ %change in income

Question 9

How does change in consumer income affect demand?

Answer 9

A rise in consumer income will result in a rise in demand
A fall in consumer income will result a fall in demand

Question 10

How is I.E.D interpreted?

Answer 10

If the value of income elasticity is greater than 1, Demand is said to be income elastic
(change in demand is proportionally greater than the change in income)
If the value us less than 1 demand is said to be income inelastic
(Change in demand is proportionally less than the change in income)

Question 11

What does income elasticity show?

Answer 11

The value of income elasticity can show whether goods are normal goods or inferior goods.

Question 12

Factors effecting I.E.D?

Answer 12

• necessity’s ( basic goods)
• income elasticity less than 1, but more than 0
• as income grows, proportionally less in spent necessities

Question 13

What is difference between inferior and normal goods?

Answer 13

Inferior goods - as income rises demand actually falls
Normal goods - an increase in income results in an increase in demand