price elasticity of demand

Question 1

define price elasticity of demand

Answer 1

Price elasticity of demand (PED) is the responsiveness of demand to a change in price.

Question 2

equation PED

Answer 2

PED =
% CHANGE IN QUANTITY DEMANDED
—————————————–
% CHANGE IN PRICE

Question 3

factors influencing PED

Answer 3

• Degree of product differentiation: no difference = easy to switch therefore elastic demand
• Number of substitutes: more substitutes = more elastic
• Luxury or necessity? luxury = more elastic, necessity = more inelastic
• Cost of switching between products: higher cost = more inelastic demand
• brand strength = good = price inelastic

Question 4

examples of elastic products

Answer 4

luxury goods

Question 5

examples of inelastic products

Answer 5

necessities

Question 6

what is the range of inelastic products?

Answer 6

less than 1

Question 7

what is the range of elastic products?

Answer 7

more than 1

Question 8

ELASTIC; price increase

Answer 8

This leads to a bigger percentage decrease in the quantity demanded.
- Revenues fall

Question 9

ELASTIC; price decrease

Answer 9

This leads to a bigger percentage increase in the quantity demanded.
- Revenues rise

Question 10

INELASTIC; price increase

Answer 10

This leads to a smaller percentage decrease in quantity demanded.
- Revenues rise

Question 11

INELASTIC; price decrease

Answer 11

This leads to a smaller percentage increase in the quantity demanded.
- Revenues fall

Question 12

inferior good

Answer 12

an item that becomes less desirable as the income of consumers increases
- e.g. instant noodles, pizza,
-. As incomes rise, one purchases more expensive, appealing or nutritious foods.