Chapter-11 Flashcards
Price elasticity of demand (14 cards)
What is the formula for calculating PED?
PED =
Percentage change in quantity demanded /
Percentage change in price.
What is price elasticity of demand (PED)?
Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price.
What is the formula for calculating percentage change in quantity demanded?
Change in demand x 100 /
Original quantity demanded
What is the formula for calculating the percentage change in price?
Change in price x 100 /
Original price
What is elastic demand?
Elastic demand occurs when the quantity demanded changes by a greater percentage than the change in price.
What is inelastic demand?
Inelastic demand occurs when the quantity demanded changes by a smaller percentage than the change in price.
What is perfectly elastic demand?
Perfectly elastic demand occurs when a change in price causes a complete change in the quantity
What is perfectly inelastic demand?
Perfectly inelastic demand occurs when a change in price has no effect on the quantity demanded.
What is unit elasticity of demand?
Unit elasticity of demand occurs when a change in price causes an equal change in the quantity demanded, leaving total revenue unchanged.
What are the determinants of price elasticity of demand?
The main determinant is the availability of substitutes. Other factors include the proportion of income spent, whether the product is a necessity or luxury, its addictiveness, whether the purchase can be postponed, market definition, and the time period considered. Luxury goods, addictive products, and necessities tend to have more elastic and inelastic demand, respectively. If the purchase can be delayed or the product is narrowly defined, demand tends to be more elastic. Demand is also more elastic over longer time periods as consumers have more time to adjust.
How does price elasticity of demand (PED) differ for the same products?
PED can change over time as products shift from luxuries to necessities, altering their demand from elastic to inelastic. It can also vary between countries due to differences in tastes, income levels, and culture. Factors such as product importance, availability of substitutes, and cultural significance influence the elasticity of demand for the same products in different contexts.
How does price elasticity of demand (PED) affect total spending and revenue?
1) Inelastic demand:
A price change causes total revenue and spending to move in the same direction.
2) Perfectly inelastic demand:
A price change causes total revenue to move by the same percentage as the price change.
3) Elastic demand:
A price change causes total revenue and spending to move in opposite directions.
4) Perfectly elastic demand:
A price increase causes demand to fall to zero.
5) Unit elasticity of demand:
Total revenue remains unchanged as price and quantity demanded change by the same percentage.
How does price elasticity of demand (PED) change with price fluctuations and shifts in the demand curve?
1) As the price rises, demand becomes more elastic as consumers become more sensitive to price increases.
2) As the price falls, demand becomes more inelastic since the change in price is less significant and does not significantly impact quantity demanded.
3) At the midpoint of a straight-line demand curve, PED is unitary, meaning the percentage change in quantity demanded matches the percentage change in price.
4) A shift in the demand curve to the right reduces PED at any given price, as consumers become less sensitive to price changes.
What are the implications of price elasticity of demand (PED) for decision-making?
1) When demand is elastic, consumers benefit from lower prices and higher quality, as producers avoid raising prices to prevent a greater demand contraction and loss of revenue.
2) A price reduction may only increase demand significantly if the rise in quantity demanded is large enough. If demand increases minimally, revenue may fall.
3) Producers may differentiate their products to reduce elasticity, making demand more inelastic and giving them pricing power.
4) Governments must consider PED when making subsidy or taxation decisions. If demand is elastic, taxes may reduce consumption. If inelastic, taxes will be less effective in discouraging consumption.
