Theme 2, 2.2 Firms, consumers and Elasticities of Demand Flashcards
Define Price Elasticity of Demand
Measures the response of quantity demanded to changes in price.
Define Price Elastic Demand
Where quantity demanded changes by a higher percentage than price.
Define Price Inelastic Demand
If quantity changes by less than the percentage change in price.
PED calculation
% change in quantity demanded
/ % change in price
Define Perfectly inelastic
- Price changes have no effect on quality.
Define Inelastic
Between 0 and -1 Quantity demanded changes by a smaller percentage as a result of price changes.
Define Unit elasticity
-1. Quantity Demanded changes by the same % as price.
Define elastic
Between -1 and infinity. Price changes lead to a more than proportionate (bigger percentage) change in quantity demanded.
Define Perfectly elastic.
-Infinity. Any price increases cause demand to fall to zero, whilst a price cut leads to more demand than the firm can cope with.
Define Necessity
These are items that are needed, something that you must have in order to live properly or do something. Tend to be goods on which poorer people spend a larger proportion of their incomes than richer people.
Define substitutes
Products that can be used as alternatives to one another to satisfy a particular need or want.
Define Luxury
Luxury items are the opposite of necessity goods or need expenses, which are the goods that people buy regardless of their income level or wealth.
Define Competitive pricing
Involves the setting of prices based on what rivals are charging, strong competition in the market.
Define Cost plus pricing
The price is decided by adding a fixed % of profit onto the cost or additional costs.
Define Skimming
Involves setting a high price before other competitors come into the market. This is often used for the launch of a new product which faces little or no competition- usually due to some technological features.
Define Penetration pricing
Is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new product because of the lower price. Often used to gain market share.
Define Predatory pricing
With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition.
Define Psychological pricing
A pricing tactic that is designed to appeal to customers who use emotional rather than rational responses to pricing messages.
Define Promotional pricing
Usually involves offering a discount to consumers on the normal selling price of a product, or more of the product at the normal price.
Define Premium pricing
A goods price is set at a higher price than competitors to give a perception of high quality.
Define Pricing strategy
The way that a business decides which price to charge, and the factors that influence that decision.
Define Brand loyalty
Arises from distinctive features that give the product some uniqueness and attract customers to make repeat purchases, regularly choosing the product in preference to those of competitiors.