Topic 7 & 8

Question 1

Price inelastic demand VS price elastic demand

Answer 1

Inelastic: small change in demand when price changes
Elastic: large change in demand when price changes

Question 2

PED Interpreting numerical values

Answer 2

. PED < 1 -> inelastic demand
. PED > 1 -> elastic demand
. PED = 1 -> unitary elasticity

Question 3

Factors influencing price elasticity

Answer 3

. Nature of product
. Availability of resources
. Proportion of income
. Time frame
. Brand loyalty

Question 4

Effect of PED on TR

Answer 4

Inelastic demand:
. Price increases -> TR increases
. Price decreases -> TR decreases
Elastic demand:
. Price increases -> TR decreases
. Price decreases -> TR increases

Question 5

Implications for business of price elasticity of demand

Answer 5

1. Pricing decisions
   Inelastic goods -> price increases = beneficial to revenue
   Elastic goods -> price decreases attract customers and boost revenue
2. Revenue predictions
3. Market strategy

Question 6

YED interpretation of values

Answer 6

. YED >1 -> elastic (luxury goods)
. 0 < YED < 1 -> inelastic (necessities)
. YED < 1 -> inferior goods

Question 7

Factors influencing YED

Answer 7

1. Necessities VS luxuries
2. Price relative to income
3. Discretionary VS essential goods
4. Product switching

Question 8

Importance of YED to business

Answer 8

1. Business planning -> growth periods and recessions
2. Diversification
3. Production adjustment
4. Marketing strategy