Micro 5 - Price elasticity of demand

Question 1

Define Price Elasticity of Demand

Answer 1

Price elasticity of demand is a measure of how the quantity demanded of a good responds to a change in its price

Question 2

What is the formula for calculating PED?

Answer 2

Percentage change in quantity demanded / percentage change in price

Question 3

Is PED a percentage?

Answer 3

No

Question 4

Why is price elasticity of demand usually negative?

Answer 4

Price elasticity of demand is usually negative because demand falls as price increases for most goods.
Therefore it is usually a negative figure divided by a positive figure.

Question 5

What are the 3 different categories that PED can be?

Answer 5

• Elastic
• Inelastic
• Unit Elastic

Question 6

What does the PED value have to be for a product to have relatively elastic demand?

Answer 6

Greater than 1

Question 7

What does a PED value of greater than 1 for a product mean?

Answer 7

It has relatively price elastic demand

Question 8

What does relatively price elastic demand mean?

Answer 8

A percentage change in price will cause a larger percentage change in quantity demanded

Question 9

The higher the the value of PED the …

Answer 9

more elastic demand is for a good

Question 10

What does a PED of ± infinity for a product mean?

Answer 10

It is has perfectly price elastic demand

Question 11

What does the PED value for a product with perfectly price elastic demand have to be?

Answer 11

± infinity

Question 12

What does perfectly price elastic demand mean?

Answer 12

Any increase in price of a product means that demand for the product will fall to zero

Question 13

What does the PED value have to be for a product with relatively price inelastic demand?

Answer 13

Between 0 and 1

Question 14

What does a PED value of between 0 and 1 mean for a product?

Answer 14

It has relatively price inelastic demand

Question 15

What does relatively price inelastic demand mean?

Answer 15

The percentage change in price will cause a smaller percentage in quantity demanded

Question 16

The smaller the PED value the …

Answer 16

more inelastic demand is

Question 17

What does the PED value have to be for a product for it to have perfectly price inelastic demand?

Answer 17

0

Question 18

What does a PED of 0 mean for a product?

Answer 18

It has perfectly price inelastic demand

Question 19

What does perfectly price inelastic demand mean?

Answer 19

Any change in price will have no effect on the quantity demanded. At any price the quantity demanded will be the same

Question 20

What does the PED value have to be for a product for it to have unitary price elasticity of demand?

Answer 20

±1

Question 21

What does a PED value of ±1 mean?

Answer 21

Unitary price elasticity of demand

Question 22

What does unitary price elasticity of demand mean?

Answer 22

The percentage change in price is equal to the percentage change in quantity demanded

Question 23

How many factors affect the Price Elasticity of Demand?

Answer 23

4

Question 24

What are the factors which affect Price Elasticity of Demand?

Answer 24

• Substitutes
• Type of good or service (How essential it is)
• Proportion of income spent on good
• Time

Question 25

How does substitutes affect PED?

Answer 25

The more available substitutes a good has the more price elastic demand it is. If there are many substitutes available then consumers can easily switch to something else if the price rises. The number of substitutes a good has depends on how closely it is defined.

Question 26

How does the type of good or service affect PED?

Answer 26

- Demand for essential items is price inelastic but demand for non-essential items tends to be price elastic - Demand for goods that are habit-forming tends to price inelastic - Demand for purchases that cannot be postponed tends to price inelastic - Demand for products with several different uses tends to be price inelastic

Question 27

How does the percentage of income spent on a good affect PED?

Answer 27

Demand for products that need a large proportion of the consumer's income is more price elastic than demand for products that only need a small proportion of income. Consumers are more likely to shop around for the best price for an expensive good

Question 28

How does time affect the PED?

Answer 28

In the long run demand becomes more price elastic as it becomes easier to change to alternatives because consumers have had the time to shop around. Also in the long run habits and loyalties can change

Question 29

What will the demand curve for relatively price elastic demand look like?

Answer 29

Relatively flat

Question 30

What will the demand curve for perfectly price elastic demand look like?

Answer 30

Horizontal

Question 31

What will the demand curve for relatively price inelastic demand look like?

Answer 31

Relatively steep

Question 32

What will the demand curve for perfectly price inelastic demand look like?

Answer 32

Vertical

Question 33

How does price elasticity of demand change along a straight-line demand curve?

Answer 33

PED changes along the demand curve from minus infinity at high price/zero demand through to an elasticity of minus one at the midpoint to an elasticity of zero at zero price/high quantity demanded.

Question 34

At which PED is total revenue maximised?

Answer 34

±1 - The nearer a firm sets a product's price to the mid-point of the demand curve the higher its total revenue will be

Question 35

If a good has elastic demand what effect will a reduction in price have on the firm's total revenue?

Answer 35

A reduction in price will increase the firm's total revenue

Question 36

If a good has elastic demand what effect will an increase in price have on the firm's total revenue?

Answer 36

An increase in price will reduce the firm's total revenue

Question 37

If a good has inelastic demand what effect will a reduction in price have on the firm's total revenue?

Answer 37

A reduction in price will reduce the firm's total revenue

Question 38

If a good has inelastic demand what effect will an increase in price have on the firms total revenue?

Answer 38

An increase in price will increase the firm's total revenue