Price Elasticity of Demand Flashcards
(23 cards)
What does PED stand for and what does it measure?
Price Elasticity of Demand (PED) measures how responsive quantity demanded is to a change in price.
What is the formula for PED?
PED = (% change in quantity demanded) ÷ (% change in price)
(Q before P: Quantity on top, Price on bottom)
What are the possible values of PED and their meanings?
PED > 1 → Elastic demand (big response to price change)
PED < 1 → Inelastic demand (small response to price change)
PED = 1 → Unitary elasticity (equal % change)
PED = 0 → Perfectly inelastic (no change in quantity)
PED = ∞ → Perfectly elastic (infinite response to price change)
Why is PED usually negative?
Because of the law of demand: when price goes up, quantity demanded goes down (and vice versa), so the % change in quantity and price are in opposite directions.
What does it mean if PED = 0?
Perfectly inelastic – quantity demanded doesn’t change no matter how much price changes (e.g., life-saving medicine).
What does it mean if PED = ∞ (infinity)?
Perfectly elastic – a tiny change in price causes demand to fall to zero (e.g., perfect substitutes in a perfectly competitive market).
PED = 0.4 – what does this tell us?
Demand is inelastic – quantity demanded is not very responsive to a price change.
E.g., price increases by 25%, quantity demanded falls by only 10%.
How do you calculate % change for PED?
% change = (Difference ÷ Original) × 100
E.g., from 4 to 5 → (1 ÷ 4) × 100 = 25%
Example: Price of sofa drops from €1,000 to €800. Demand rises from 2,000 to 3,800. What is PED?
% change in quantity = (3,800 - 2,000) ÷ 2,000 × 100 = 90%
% change in price = (800 - 1,000) ÷ 1,000 × 100 = -20%
PED = 90 ÷ 20 = 4.5
Very elastic – large response to price drop.
- Inelastic Demand Curve (PED < 1)
Shape: Steep (almost vertical)
Label: D (PED < 1)
A large change in price causes only a small change in quantity demanded.
Think: Necessities like petrol, insulin, cigarettes (addictive), salt.
Diagram Tip:
Draw a steep downward-sloping line. When price rises, quantity falls a little.
- Elastic Demand Curve (PED > 1)
Shape: Flat (almost horizontal)
Label: D (PED > 1)
A small change in price causes a large change in quantity demanded.
Think: Luxuries or goods with many substitutes, e.g., designer bags, restaurant meals, soft drinks.
Diagram Tip:
Draw a shallow downward-sloping line. A small price drop causes a big increase in quantity.
- Perfectly Inelastic Demand (PED = 0)
Shape: Vertical line
Label: D (PED = 0)
No change in quantity no matter how price changes.
Example: Life-saving medicine (like insulin for diabetics).
- Perfectly Elastic Demand (PED = ∞)
Shape: Horizontal line
Label: D (PED = ∞)
At one exact price, consumers will buy any quantity.
If price rises even slightly, demand drops to zero.
Example: Perfect substitutes in theory (like in perfect competition).
What does the “S” in SPLAT stand for?
Substitutes – More substitutes = more elastic demand. Fewer substitutes = more inelastic demand.
How do substitutes affect PED?
More substitutes make demand more elastic; fewer substitutes make demand more inelastic.
What does the “P” in SPLAT stand for?
Proportion of Income – The higher the price is as a percentage of income, the more elastic the demand.
Why is demand for salt more inelastic than for a car?
Salt takes a tiny share of income, so demand doesn’t change much with price. Cars take a large share, so demand is more elastic.
What does the “L” in SPLAT stand for?
Luxury vs Necessity – Luxuries are more price elastic; necessities are more inelastic.
Give an example of a necessity with inelastic demand.
Medicine – people still need it even if the price goes up.
What does the “A” in SPLAT stand for?
Addictiveness – Addictive or habit-forming goods tend to have more inelastic demand.
Why is the demand for cigarettes typically inelastic?
Because they’re addictive, consumers still buy even if prices rise.
What does the “T” in SPLAT stand for?
Time Period – Demand is more elastic in the long run and more inelastic in the short run.
Why does PED tend to increase over time?
In the long run, consumers have time to find alternatives or adjust behavior.
