Topoc 7- Price Elasticity Of Demand

Question 0

Price elasticity of demand (PED)

Answer 0

Is a measure of the responsiveness of a product to a change in price

Question 1

How to work out PED (price elasticity of demand)

Answer 1

PED= percentage change In quantity demanded/percentage change in demand

%/\QD divided by %/\P

Difference /originalx100

Question 2

What happens if PED is greater than one

Answer 2

-Product is very responsive to price changes
-consumers respond to the change in price
-this is elastic
Bottom percentage will be lower than top

Question 3

What happens if PED is equal to 1

Answer 3

• demand is unit elastic because a change in price has led to the same percentage change in quantity demanded
• top and bottom are the same

Question 4

What happens if PED is less than one

Answer 4

• the demand for this good is inelastic
• consumers don’t respond to price changes

Bottom percentage will be bigger than top

Question 5

What happens if PED is infinite

Answer 5

-very responsive it means that if price increases demand will totally disapear

Question 6

What does unit elasticity look like on a graph

Answer 6

Rectangular hyperbola (curve)

p |   .               d
   |    .             .
   |       .   .   .
   |\_\_\_\_\_\_\_\_\_\_\_
               Q

Question 7

What does perfectly Inelastic demand look like on demand graph

Answer 7

Straight line in the middle

p |        |
   |        |
   |        |
   |\_\_\_\_d\_\_
               Q

Question 8

What does relatively inelastic demand look like on a graph

Answer 8

p | \
   |   \ 
   |    \
   |\_\_\_\d\_\_\_
               Q

Question 9

What does perfectly elastic demand graph look like

Answer 9

p |
   |   
   |\_\_\_\_\_\_\_\_\_\_D
   |     
   |\_\_\_\_\_\_\_\_\_\_\_\_
                        Q

Question 10

What does relatively elastic demand look like on a demand graph

Answer 10

p |  \
   |       \ 
   |            \
   |\_\_\_\_\_\_\_\_\_d_
                 Q

Question 11

Total revenue

Answer 11

Is the value of goods and services sold by a firm

Calculated by multiplying the quantity sold by the price

Question 12

What happens to total revenue when demand is Inelastic

Answer 12

A price increase causes total revenue to increase

Question 13

What happens to total revenue when demand is Elastic

Answer 13

A price increase will cause total revenue to decrease

Question 14

What happens to total revenue when demand is unit elastic

Answer 14

An increase in price causes total revenue to remain the same

Question 15

Influence on the price elasticity of demand:

5 factors

Answer 15

Availability of substitutes
Nature of goods
Relative share of the good/service overall expenditure
The time period allowed following a price change
Whether the good is subject to habitual consumption

Question 16

Influence on the price elasticity of demand:

Availability of substitutes

Answer 16

• the larger the number of close substitutes of a good available in the market, the greater the elasticity for that good
• Demand for goods with no close substitute=inelastic (they do not respond to increase or decrease in price) as they do not have alternative products to purchase instead

Question 17

Influence on the price elasticity of demand:
Nature of goods
Relative share of the goods/service in overall expenditure

Answer 17

-Necessities: Relatively inelastic demand e.g salt, sugar
Luxury goods: Highly elastic e.g cars
-consumers may not notice changes in inexpensive goods which only take up a small proportion of their overall expenditure>demand for these goods are relatively inelastic. However a good which is expensive and holds a large proportion of overall expenditure = elastic

Question 18

Influence on the price elasticity of demand:
the time period allowed following the change in price
Whether the good is subject to habitual consumption

Answer 18

• demand is more price elastic, the longer that consumers have to respond to a price change. They have more time to search for cheaper substitutes and switch their spending
• habits or commitments to a certain pattern of consumption may mean that consumers may be less price sensitive to changes in the price of goods (however people do eventually adjust to price changes)