Theme 1.2.4: Price Elasticity Of Demand (PED)

Question 1

Elasticity

Answer 1

A measure of responsiveness to change

Question 2

Price Elasticity of Demand

Answer 2

A measure of the extent to which a change in price causes a change in quantity demanded

Question 3

PED Formula

Answer 3

% Change in quantity demanded / % Change in price

Question 4

Price Elastic

Answer 4

A price change causes a proportionally bigger change in quantity demanded, change in Q is higher than change in P this is anything beyond -1

Question 5

Unit Price Elasticity

Answer 5

A change in price causes a proportionate change in quantity demand, % change in Q is the same as % Change in D, this is -1

Question 6

Price Inelastic

Answer 6

A price change causes a proportionately smaller change in quantity demanded, % Change in Q less than % Change in P, this is anything between 0 and -1

Question 7

PED is -2, what is this?

Answer 7

Price Elastic as its beyond -1

Question 8

PED is 0.5, what is this?

Answer 8

Price inelastic as it’s between 0 and -1

Question 9

PED is 1, what is this?

Answer 9

Unit Price Elasticity, change in Quantity Demanded and Price is the exact same

Question 10

PED is beyond -1, this means price is?

Answer 10

Elastic

Question 11

PED is between 0 and -1, this means price is?

Answer 11

Inelastic

Question 12

% Change in Q is less than % Change in P, what does this mean?

Answer 12

Price is Inelastic and is between 0 and -1

Question 13

% Change in Q is Higher than % change in P, what does this mean?

Answer 13

Price is elastic and is beyond -1

Question 14

Factors effecting Price Elasticity of Demand

Answer 14

. Number and Closeness Of Substitute Products - The more substitute products the more price elastic a product is as customers have lots of other competitors to go to
. Luxury or Necessity - Luxury products tend to be more price elastic whilst necessities tend to be price Inelastic as for example toothpaste is always needed
. Proportion of income spent on a good - basically high cost vs low cost, something such as a can of coke having its price increased by 10% is likely to be Inelastic whilst a luxury holiday increasing its prices is likely to be price elastic
. Time Scale - More durable products are likely to be more price elastic with time, for example a kettle, people aren’t really going to be paying attention to the changing prices of kettles they just want a new one if theirs breaks