Price elasticity of Demand

Question 1

Define PED

Answer 1

A measure of the responsiveness of the quantity demanded of a product to a change in its price in % terms

Question 2

Give an equation for PED

Answer 2

%change in quantity demanded/%change in price

Question 3

Describe and explain what is meant by a relatively price elastic good

Answer 3

A price elastic good has PED > 1 and is very responsive to a change in price so leads to an even bigger change in demand. It has a fairly small gradient. %change in demand>% change in price

Question 4

Describe and explain what is meant by a price inelastic good

Answer 4

A price inelastic good has PED < 1 and is relatively unresponsive to a change in price so a small change in demand. It has a fairly large gradient. % change in demand

Question 5

Describe and explain what is meant by a unitary elastic good

Answer 5

A unitary elastic good has a PED = 1 and change in demand = to change in price and has a L shaped curve

Question 6

Describe and explain what is meant by a perfectly inelastic good

Answer 6

A perfectly inelastic good has PED = 0 and demand does not change when price changes so is a | shape

Question 7

Describe and explain what is meant by a perfectly elastic good

Answer 7

A perfectly elastic good has PED = infinity and has a demand which falls to zero when price changes so is —- shaped

Question 8

If the price of bread increased by 15% and the quantity demanded decreased by 20% the PED of bread is

Answer 8

-20%/15%=-1.33 which is > 1 and so relatively price elastic

Question 9

PED is important because

Answer 9

it allows entrepreneurs to know whether to increase their price or not

firms are interested in XED as it allows them to see how many comepetitors they have therefore are less likely to be affected by price changes by other firms if they are selling complementary or substitute goods

Question 10

Factors influencing PED

Answer 10

Necessity (PED<1 if necessary)

Substitutes (If more substitutes PED>1)

Addictiveness (PED<1 as people addicted so demand isn’t affected by price as much (evaluate with real life))

Durability of good

Peak and off peak demand

Proportion of income spent on good

Question 11

What does the sign show?

Answer 11

-ve if normal good as demand curve -ve, sign doesn’t change elasticity just whether normal or inferior, +ve giffen good

Question 12

If firms sell a good with the tax burden falls

Answer 12

if inelastic then on consumer, if elastic then falls on producer

Question 13

If good inelastic firms can… if elastic then…

Answer 13

raise prices without quantity sold falling significantly increasing total revenue,

if price rises quantity sold falls reducing total revenue

Question 14

Elasticity along a curve with \

Answer 14

elasticities vary along going from elastic to inelastic down the curve

perfectly elastic at y axis
relatively elastic
unit elasticity in middle
relatively inelastic
perfectly inelastic at x axis

Question 15

Inferior goods (YED) =

Answer 15

income increases demand falls, YED < 0 (negative)

Question 16

Normal goods (YED)

Answer 16

income increases demand increases, YED > 0 (positive)

Question 17

Luxury goods (holidays)
 (YED)

Answer 17

Income increases causes larger increase in demand, YED > 1

Question 18

During periods of economic growth when incomes are rising, firms may…

Answer 18

switch to producing more luxury goods and fewer inferior goods

Question 19

PED of neccessity goods

Answer 19

0, perfectly inelastic

Question 20

Complementary goods XED

Answer 20

Negative (fish and chips)

Weak complements - large fall in price leads to small increase in QD i.e. steep curve

Close complements - small fall in price leads to large increase in QD i.e. shallow curve

Question 21

Substitute good XED

Answer 21

Positive (Pepsi and coke)

Weak substitutes - a large increase in price leads to a smaller increase in QD

Close substitutes - a small increase in the price leads to a large increase in QD

Question 22

Unrelated goods have a XED of

Answer 22

0