Price elasticity of demand (PED) Flashcards
What is the ‘Price elasticity of demand’?
The responsiveness of demand to a change in price
What is ‘Inelastic demand’?
Change in price results in a proportionately smaller change in the quantity demanded (alternative term: price inelastic)
What is ‘elastic demand’?
change in price results in a greater change in the quantity demanded (alternative term: price elastic)
What does it mean to be ‘perfectly elastic’?
It’s demand where PED = infinity ( an increase in price will result in zero demand)
What does it mean to be ‘perfectly inelastic’?
It’s demand where PED = 0 (a change in price will result in no change in the quantity demanded)
What’s ‘Unitary elasticity’?
It’s where PED = -1 (the responsiveness of demand is proportionately equal to the change in price)
How do you calculate price elasticity of demand (PED)?
PED = Percentage change in Quantity demanded / Percentage change in price.
What does a PED value of less than 1 indicate?
A PED value of less than 1 indicates inelastic demand.
What does a PED value of greater than 1 indicate?
A PED value of greater than 1 indicates elastic demand.
What factors affect the price elasticity of demand?
Factors affecting price elasticity include:
- availability of substitutes, degree of necessity, and proportion of income spent on a product.
How does the availability of substitutes affect price elasticity of demand?
Goods with lots of close substitutes tend to have elastic demand, while goods with few or no substitutes have inelastic demand.
How does the proportion of income spent on a product affect the price elasticity of demand?
If consumers spend a large proportion of their income on a product, demand tends to be more elastic
How does the relationship between PED and total revenue work?
Total revenue rises with a price cut if demand is inelastic, and falls with a price cut if demand is elastic.
