Econ chapter 2.7 (Price elasticity of demand)

Question 1

How do you define Price Elasticity of demand?

Answer 1

A measure of the responsiveness of the quantity demanded to a change in price

Question 2

What is the equation for PED?

Answer 2

PERCENTAGE CHANGE in quantity demanded
______________________________

         PERCENTAGE CHANGE in price

Question 3

How do you calculate percentage change in price?

Answer 3

Change in price
___________ x 100

Original price

Question 4

How do you calculate percentage change in QD?

Answer 4

Change in Qd
___________ x 100

Original Qd

Question 4

What does an elastic PED graph look like?

Answer 4

often drawn as a flattish curve to illustrate how the % change in Qd is much larger than % change in price

Question 5

What does a PED value less than 1 show?

Answer 5

It shows that it is inelastic - the %change in Qd is smaller than change in price so (small number)/(larger number) results in a decimal

Question 6

What does a PED value = 1 suggest?

Answer 6

unit elasticity- percentage change of quantity demanded is the same as the % change in price.

Question 7

What does a PED value greater than 1 suggest?

Answer 7

PED is elastic- the %change of Qd is larger than % change in Price (larger number)/(smaller number)= greater than one

Question 8

How is inelastic PED shown on a graph?

Answer 8

the curve is drawn steep to show that Qd does not change as much as price

Question 9

Why is the sign of any PED value going to be negative?

Answer 9

due to the inverse relationship between price and quantity demanded, as described by the law of demand.

e.g For example, a 10% increase in price might lead to a 5% decrease in quantity demanded, yielding a PED of -0.5.

(the absolute value is typically used however.)

Question 10

Define elastic demand

Answer 10

When the quantity demanded changes by a greater percentage than the change in price.

Question 11

define inelastic demand

Answer 11

When the quantity demanded changes by a smaller percentage than the change in price.

Question 12

Define total revenue

Answer 12

Total Revenue (TR) is the total amount of money a firm receives from selling its goods or services. It’s calculated by multiplying the price per unit by the quantity sold.

Question 13

What are the determinants of PED

Answer 13

Availability of Substitutes

Proportion of Income

Necessity vs. Luxury

Time Period

Addictiveness

Question 14

What happens when there are few substitues for a good or service?

Answer 14

demand will be inelastic- if the price of a good with few substitutes increases, consumers can’t switch to other substitute products, therefore causing a relatively small drop in Qd

e.g insulin

Question 15

What happens when the good has a close substitute or has many?

Answer 15

elastic demand- a rise in price will likely cause a significant fall in the Qd as consumers will switch to the substitute

Question 16

What happens when the good is addictive?

Answer 16

Demand is inelastic- people find it difficult to cut back on their purchases of products which are addictive

e.g cigarettes, coffee

Question 17

What is the number of substitutes determined by

Answer 17

how broadly the good is defined- for example, there are not many substitutes for ‘fruits’ making it’s PED inelastic compared to a more narrowly defined ‘apples’ which has many substitues

Question 18

The more substitutes a good has the more ________ its demand is

Answer 18

elastic

Question 19

What does it mean for elasticity if the good is a necessity?

Answer 19

necessity- a good/service we consider to be essential or necessary in our lives

The demand is usually inelastic - peoples lives and health depend on these things

e.g food, medication, masks

Question 20

What does it mean for elasticity if the good is a luxury?

Answer 20

the demand is usually elastic

e.g demand for diamonds tends to be very elastic as people do not rely on it for survival

Question 21

What does it mean for elasticity if the good is worth a low proportion of income?

Answer 21

inelastic demand-

e.g salt takes up a small percentage of income- a 5% increase in price should result in only a small fall in demand.

Question 22

the lower the proportion of one’s income needed to buy a good, the more _________ the demand

Answer 22

inelastic

Question 23

What does it mean for elasticity if the good is worth a high proportion of income?

Answer 23

demand is elastic

e.g big screen tvs take up a large proportion of income- a 5% increase in price should result in a greater contraction in demand.

Question 24

How does the time frame affect the price elasticity of demand in the short run?

Answer 24

In the short run, demand is generally more inelastic because consumers need time to adjust their behaviour. They may continue purchasing a good out of habit or due to a lack of immediate alternative, or because they haven't noticed a price change.

Question 25

How does the time frame affect the price elasticity of demand in the long run?

Answer 25

In the long run, demand becomes more elastic as consumers have sufficient time to find substitutes, adjust their consumption habits, or make lifestyle changes in response to price changes

Question 26

How do contracts/ autopay affect price elasticity of demand?

Answer 26

Contracts make demand more inelastic since consumers are locked into agreements and cannot easily switch, even if prices chang

Question 27

How does closeness of substitutes affect price elasticity of demand?

Answer 27

More close substitutes make demand elastic, as consumers can easily switch if the price rises. Few substitutes make demand inelastic.

Question 28

How does availability of substitutes impact price elasticity?

Answer 28

If substitutes are readily available, demand is elastic. If they are scarce or unavailable, demand is inelastic.

Question 29

What is revenue

Answer 29

the money a firm makes from sales (not the same thing as profit -revenue-costs- )

Question 30

How is total revenue shown on a graph?

Answer 30

as a rectangle on a demand diagram (area of rectangle= base x height)

Question 31

In what ways is revenue impacted by a fall in price?

Answer 31

more quantity sold (more revenue) at a lower price (less revenue) We can deduce the degree of loss and gain with PED.

Question 32

In what ways is revenue impacted by a fall in price?

Answer 32

less quantity sold (less revenue) at a higher price (more revenue) We can deduce the degree of loss and gain with PED.

Question 33

What will a fall in price do to revenue of the demand is ELASTIC?

Answer 33

The gain due to greater Qd / quantity sold > loss due to fall in price Total revenue increases

Question 34

What will a fall in price do to revenue of the demand is INELASTIC?

Answer 34

loss due to fall in price>The gain due to greater Qd / quantity sold Total revenue decreases-

Question 35

What will increase in price do to revenue if demand is ELASTIC?

Answer 35

Loss due to less Qd/quantity sold> Gain due to increase in p Total revenue decreases

Question 36

What will increase in price do to revenue if demand is INELASTIC?

Answer 36

Gain due to increase in p> Loss due to less Qd/quantity sold Total revenue increases

Question 37

If the firm wishes to maximise their revenue, they should increase the price if demand is_______ and _________ the price if demand is elastic

Answer 37

inelastic lower

Question 38

Why is PED important for firms?

Answer 38

helps firms maximise revenue. Firms know that if demand is elastic they should lower prices- if demand is inelastic they should increase prices.

Question 39

Why is PED important for governments?

Answer 39

Helps them understand the impact of taxes- indirect taxes on goods with ELASTIC demand will cause a big fall in quantity sold. Taxes on goods with INELASTIC demand will cause only a small fall in quantity sold if a govt wants to raise tax revenue, they should place taxes on goods which have inelastic demand.

Question 40

Why is PED important for consumers?

Answer 40

They should be aware that if they buy a good/service which has inelastic demand, they are more likely to be affected by high prices and poor quality.

Question 41

What should u be careful of when talking about PED

Answer 41

you dont say that the good/service is inelastic/elastic you say the demand for it is elastic/inelastic