2.6 Price Elasticity of Demand Flashcards
(14 cards)
Define Price Elasticity of Demand
The responsiveness of the quantity demanded to changes in its price
Formula for PED?
% change in quantity demanded / % change in price
Value for price elastic demand?
Always above 1
Value for price INelastic demand?
Always below 1
Define price inelastic demand
A change in price makes a smaller change in demand
Define price elastic demand
a change in price makes a higher change in quantity demanded
What is the value of unitary price elastic demand?
1
Define unitary price elastic demand
When %change in price and %change in demand are equal to each other
What are 3 determinants of PED?
- No. of substitutes
- Time Period
- Proportion of Income spent on commodity
Explain how no. of substitutes determines PED
if a product has many substitute products it will have an elastic demand; vice versa
Explain how time period determines PED
In a shorter time period, there are is no time to find substitutes or change habits, thus inelastic demand; vice versa
Explain how proportion of income spent on commodity determines PED
Necessities will have an inelastic demand like rice and water as they are essential, however luxury goods like cars will have an inelastic demand as they aren’t essential for survival
What can producers do to increase revenue if a product has an elastic demand?
Lower prices
What can producers do to increase revenue if a product has an INelastic demand?
Raise prices
