What is price elasticity of demand (PED)?
Enjoying Flashcards?
Tell us what you think
What is price elasticity of demand (PED)?
Price elasticity of demand reveals how responsive the change in quantity demanded is to a change in price.
State the formula to calculate price elasticity of demand .
Formula.
PED = (% change in QD) ÷ (% change in P)
Define the term price inelastic demand.
Price inelastic demand is when the percentage change in quantity demanded is less than proportional to the percentage change in price, e.g a 10% increase in price leads to a 2% decrease in the quantity demanded.
What does the term unitary price elasticity mean?
Unitary price elasticity means the percentage change in quantity demanded is exactly equal to the percentage change in price.
Define the term price elastic demand.
Price elastic demand occurs when the percentage change in quantity demanded is more than proportional to the percentage change in price, e.g a 10% decrease in price leads to a 30% increase in the quantity demanded.
How is perfectly elastic demand characterised?
Perfectly elastic demand occurs when the quantity demanded falls to zero with any increase in price.
What impact does the availability of substitute products have on PED?
The availability of substitute products results in a higher value of PED (relatively elastic demand).
State what impact the addictiveness of a product has on its PED.
Addictiveness turns products into necessities, resulting in a low value of PED (relatively inelastic demand).
True or False?
Economists always include the negative sign when presenting the answer in a price elasticity of demand calculation.
False.
Economists usually do not include the negative sign when presenting the answer in a price elasticity of demand calculation. This is due to the fact that the answer is always negative, and the absolute value is used for analysis.
True or False?
In the short term, demand for most products is more price elastic.
False.
In the short term demand is less responsive to price changes, resulting in a lower PED (relatively inelastic).
What is meant by the term total revenue?
Total revenue is the amount of money a firm receives from selling its goods or services.
Define the total revenue rule.
The total revenue rule states that in order to maximise revenue, firms should increase the price of inelastic products and decrease the price of elastic products.
How does decreasing the price impact products with elastic demand?
For products with elastic demand, a small decrease in price causes a large increase in the quantity demanded, leading to an increase in total revenue.
What is the impact on revenue when prices increase for products with inelastic demand?
When prices increase for products with inelastic demand, there is a smaller decrease in the quantity demanded, leading to an increase in total revenue.
Define the term price discrimination.
Price discrimination occurs when a firm charges different prices to different consumer segments in order to maximise revenue.
True or False?
Taxing price inelastic goods reduces tax revenue.
False.
Governments can raise more tax revenue by taxing price inelastic goods without significantly reducing demand.
What is the impact of subsidising price elastic goods?
Subsidising elastic goods can lead to a greater than proportional increase in demand e.g. a subsidy of 10% may lead to 20% increased demand
State the meaning of a demerit good.
A demerit good is a product that has external costs for society e.g cigarettes.
State the formula used to calculate revenue.
Formula:
Revenue = Price x Quantity
True or False?
If the PES of labour is low (inelastic), then production costs for firms will rise quickly during periods of increasing demand.
True:
If the PES of labour is low (inelastic), then production costs for firms will rise quickly during periods of increasing demand, when firms need to hire additional workers.