Economics - 1.2.6a - Price Elasticity of Demand Flashcards
What is the formula for PED
% change in quantity demanded / % change in price
what is the formula for % change in price
new price - old price / old price X 100
what are the steps in answering a PED question
1) find the % change in price
2) divide the % change in price by % change in demand
3) round up the result to 3 significant figures
what are the values of PED
equal to 1 = price unitary demand
equal to 0 = perfectly inelastic demand
equal to infinity = perfectly elastic demand
What are the values for elastic and inelastic
price elastic = value more than 1
price inelastic = value between 0 and 1
what is inelastic demand
goods where prices change but demand stays the same as there are a few substitutes
results between 0 and 1 are inelastic
how does the availability of substitutes influence the level of PED?
demand is sensitive to price with the more substitutes there are
lots of substitutes makes demand sensitive to price and the product is price elastic
how does necessity goods influence the level of PED
lower price elasticities as consumers must purchase the product despite price changes
Eg petrol is a necessity so people still purchase it even if the price increases making the price very inelastic
How do luxury goods influence the level of PED
very expensive and take up a large % of consumers incomes so they are very cautious of a price increase
luxury goods are a large investment for consumers who pay attention to the price making the price elastic
how does the expense of a product influence the level of PED
expensive products are elastic as consumers are careful with the price
inexpensive products are inelastic as they have small price increases and so consumers are insensitive to price changes
what is the significance of PED for firms
firms can plan what happens to sales and sale revenue if prices rise or fall
firms can use price discrimination with students on certain products due to their price sensitivity
if firms are in a price inelastic market they should try and compete using other methods
what is the significance of PED for governments
important to the gov for taxation to impose sales taxes or value added taxes to raise the prices of goods and services
the PED of these goods helps to assume the impact of the tax on the good
Eg sales taxes are put on inelastic hotels so that hotels dont lose business and the tax revenue falls
govs dont raise sales taxes on elastic items
why isnt PED the same the whole way along the demand curve
if prices are high, a change of 1p is a very small price change and the increase from quantity 1 to 2 is large
if prices are low, a change of 1p is a large price change and quantity demanded from 100 to 101 is a small change
how are PED and total revenue linked?
if demand is elastic and the price falls, quantity demanded rises more than proportional so total revenue increases
if demand is inelastic and price falls, quantity demanded rises less than proportional so total revenue decreases
