price elastcity of demand Flashcards
what is the law of demand
- price increases = demand fall
or - prices falls = demand increases
= negative correlation between price & demand
what is PED
measures the responsiveness of demand to changes in price
formula for PED
% change in quantity demanded / % change in price
QPR = Q at the top
what does it mean if the number is negative & greater than 1
price elastic = demand is sensitive to price changes
quantity demanded is greater than the price
what does it mean if the number is negative & less than 1
inelastic demand = demand is not sensitive to change in price
(when quantity demanded is smaller than the price)
what happens to revenue if there is elastic PED
price increase = revenue falls & vice versa
what happens to revenue if PED is inelastic
price rise = revenue rise & vice versa
what way to remember that
EO I.S
elastic opposite & Inelastic same
why is PED useful
- can predict impact of price change on QD
= need more staffing, increase stock control, cash flow forecasts will be accurate
why is PED useful for international businesses
exchange rates e.g. strong pound = imports cheap/ exports dear = price increase = EO I.S
2 ways a business wants to be more price inelastic
- have fewer rivals ( monopoly or non saturated market)
- product is extremely cheap
difficulty of PED
difficult to calculate = external factors e.g. incomes, economy, weather
