Chapter 4- Price Elasticity Flashcards
What is PED?
Price elasticity of demand. The change in demand due to the change in price.
Calculation for PED:
%change in quantity demanded/ % change in price
Simple method calculation:
(New price - Initial price / initial price) x 100
What is the average (midpoint arc ) method?
measures the responsiveness of demand compared to the average demand and price.
(New price - initial price / average price) x 100
PED values:
> 1 means elastic
<1 means inelastic
0 means unitary
What does inelastic demand mean?
demand is less than percentage change in price
What influences can make PED be higher?
many substitutes available, brand loyalty is weak, high proportion of income is spent on product
What is price elasticity of supply?
A measure of the responsiveness of quantity supplied to a change in price.
Formula for price elasticity of supply:
% change in quantity supplied / % change in price.
Conditions that affect elasticity of supply:
spare capacity, tech permits an increase in supply at little or no extra cost, time period since the price changed is longer
