Price elasticity of demand

Question 1

Define price elasticity of demand (PED)

Answer 1

A measure of the responsiveness of demand to a change in price

Question 2

What is the formula of PED?

Answer 2

%change in quantity demanded
divided by %change in price

Question 3

What is inelastic demand?

Give some examples

Answer 3

A change in price which leads to a less than proportional change in quantity demanded
–> PED value less than 1: (PED < 1)

Examples: Addictive products
- An increase in the price of tap water

Question 4

What is elastic demand?

Give some examples

Answer 4

A change in price which leads to a greater than proportional change in quantity demanded.
–> PED value greater than 1: (PED > 1)

Examples: Luxury products
- Sony TV
- Andrex toilet paper (branded)

Question 5

What is revenue?
Formula?

Answer 5

the amount of money a firm receives from selling its goods/services

Total revenue = Price x Quantity

Question 6

What happens to revenue when a good has inelastic demand?

Answer 6

To an increase in price revenue increases

Question 7

What is unitary elasticity?

Answer 7

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

Question 8

How do you calculate a percentage change?

Answer 8

(New - old), divided by old, multiplied by 100.

Question 9

What happens to revenue with an elastic good?

Answer 9

Revenue increases to a decrease in price

Question 10

List 5 factors affecting PED

Answer 10

• Nature or type of good
• Availability of substitutes
• Price levels
• Income levels
• Time period

Question 11

Compare the factors of elastic and inelastic goods

Answer 11

Elastic : Inelastic
- Long term - Short term
- Luxury - Necessity
- High % of - Low % of income
income
- Substitute good - Non-substitute
good