Price Elasticity of demand

Question 1

when price increases, quantity..

Answer 1

when price increases, quantity demand falls

Question 2

what does the price elasticity of demand measures

Answer 2

price elasticity of demand measures how much demand responds to changes in price

Question 3

what is the PED formula

Answer 3

PED= % change in demand / % change in price

Question 4

does PED have positive or negative coefficient

Answer 4

PED has negative coefficient

Question 5

PED values in relatively inelastic

Answer 5

relatively inelastic: between -1 and 0

Question 6

PED value when unitary elastic

Answer 6

unitary elastic: -1

Question 7

PED value when relatively elastic

Answer 7

relatively elastic: between -1 and infinity

Question 8

PED value when perfectly elastic

Answer 8

perfectly elastic: - infinity, if price goes up, nobody will buy it as there’s an alternative

Question 9

PED value when perfectly inelastic

Answer 9

perfectly inelastic: 0, no matter the price people will buy the product

Question 10

percentage change formula

Answer 10

percentage change= new-old / old, x 100

Question 11

Factors determining the PED of a product

Answer 11

• number of close substitutes available for consumers
• price of product in relation to total income
• cost of substituting between different products
• brand loyalty and habitual consumption
• degree of necessity/ luxury

Question 12

evaluate number of close substitutes available for consumers

Answer 12

• the more close substitutes there are, the more price elastic the demand

Question 13

evaluate price of product in relation to total income

Answer 13

when the % budget is high, demand is more price sensitive

Question 14

evaluate cost of substituting between different products

Answer 14

• when substituting/ switching costs are high, demand will tend to be price inelastic

Question 15

evaluate brand loyalty and habitual consumption

Answer 15

• high levels of brand loyalty makes demand less price elastic
• persuasive advertising makes demand price inelastic

Question 16

evaluate degree of necessity/ luxury

Answer 16

standard assumption is that necessities have lower PED where luxuries are an optional spend

Question 17

Revenue formula

Answer 17

Revenue - price x quantity

Question 18

when a firm is selling a product with relatively inelastic PED, they should

Answer 18

When a firm is selling a product with relatively inelastic PED, they should increase prices in order to increase revenue

Question 19

when PED is inelastic

Answer 19

PED is inelastic, firm should increase prices to increase revenue

Question 20

when PED is elastic

Answer 20

PED is elastic, a firm should decrease prices to increase revenue

Question 21

PED can vary along

Answer 21

PED varies along the demand curve

Question 22

PED can vary along

Answer 22

PED varies along the demand curve

Question 23

Income elasticity of demand, abbreviation

Answer 23

YED

Question 24

YED shows what

Answer 24

YED shows how much demand changes when income changes

Question 25

What does Y in YED state

Answer 25

Y means income

Question 26

In YED is there a positive or negative coefficient

Answer 26

YED can be positive or negative

Question 27

if positive YED and negative YED, what goods are they?

Answer 27

Positive YED - normal good
Negative YED - Inferior good