YED and PED

Question 1

Whats the formula PED

Answer 1

% change in quantity demand / % change in price x100

Question 2

What is a price elasticity of demand

Answer 2

a measure of how responsive demand is to a change in price- always a negative value and has an inverse relationship between price and demand.

Question 3

where can you gather the info for PED

Answer 3

past market data

Question 4

what does price elastic and inelastic demand mean for a business?

Answer 4

price ELASTIC demand means that a change in price (best to decrease) will lead to more than proportional change in demand.
price INELASTIC demand means that a change in price will lead to a less than proportional change in demand ( best to increase price).

Question 5

What does it mean if PED is between 0 and -1

Answer 5

demand is price inelastic and the business should increase price

Question 6

what does it mean if PED is lesser than -1

Answer 6

demand is price ELASTIC and the business should decrease price

Question 7

what are the consequences of changing price for price elastic demand?

Answer 7

raising selling price: lose money and less revenue
decrease selling price: increase in demand so therefore increase in revenue

Question 8

what are the consequences of changing price with inelastic demand

Answer 8

raise selling price: increase in revenue as demand stays the same
decrease selling price: decrease in revenue because demand stays the same

Question 9

what are 3 factors that affect PED

Answer 9

• availability of substitutes- closer and more available = higher PED
• price of competitor goods
• time- a long period of time allows other firms to produce similar products and customers have more chance of adopting their buying habits

Question 10

what are 3 factors that influence PED?

Answer 10

• BRANDING ( firms spend time and money building up their brand image, brand loyalty= customers willing to pay more= can raise price as the PED is lower)
• INCOME ( if consumer incomes are higher= issue of price is less important to the consumer= easier to raise price as PED is lower)
• NATURE OF THE GOOD (luxury good= price elastic= demand will be more sensitive to price change , a necessity good= price inelastic= demand will be ,less sensitive to price change)

Question 11

what is income elasticity of demand (YED)

Answer 11

a measure of the responsiveness of demand to a change in income- can be negative or positive and income and demand move in the same direction or opposite

Question 12

what is the formula of YED?

Answer 12

% change in quantity demand / % change in income = YED

Question 13

what is a normal good?

Answer 13

a normal good is when demand for a product increases when income also increases

Question 14

what is an inferior good?

Answer 14

inferior good is when demand for a products decreases when incomes increase - inferior goods will always have a negative income elasticity of demand (YED)

Question 15

what is income inelastic ( YED inelastic)

Answer 15

between 1 and -1 (normal good) = demand changes at a lower proportion than the change in income

Question 16

what is income elastic (YED elastic)

Answer 16

inferior good YED elastic= less than -1
luxury good YED elastic= more than 1
YED elastic= demand is very responsive to changes in income

Question 17

what is YED determined by?

Answer 17

• WHETHER THE GOOD IS A NECESSITY OR LUXURY - at high standard if living increasing consumer incomes see additional demand towards luxury goods as demand for necessities are satisfied
• THE LEVEL OF INCOME OF A CONSUMER- poorer consumers spend their income on necessities but wealthier consumers= YED for necessities move towards zero as consumers are satisfied with the amount of product