Price Elasticity of Demand Flashcards Preview

Economics > Price Elasticity of Demand > Flashcards

Flashcards in Price Elasticity of Demand Deck (7)
Loading flashcards...
1
Q

What are the main determinants of price elasticity of demand?

A
  • Substitutes
  • Percentage of Income
  • Necessities or Luxuries
  • Habit forming goods
  • Time
2
Q

What is the equation to calculate price elasticity of demand?

A

Percentage change in quantity demanded

Price elasticity of demand = ——————————————————————

                                                          Percentage change in price
3
Q

How do you calculate the total revenue?

A

Price of good or service **X **Quantity demanded

4
Q

How do you calculate the percentage change in DEMAND?

A

LARGER NUMBER - SMALLER NUMBER

                                    --------------------------------------------------------  X 100

                                                      LARGER NUMBER
5
Q

How do you calculate the percentage change in PRICE?

A

LARGER NUMBER - SMALLER NUMBER

                                   ---------------------------------------------------------   **X100**

SMALLER NUMBER

6
Q

iF DEMAND IS ELASTIC SHOULD A COMPANY INCREASE THERE PRICE?

A

NO BECAUSE THE DEMAND IS SENSITIVE TO CHANGES IN PRICE SO IT IS LIKELY THAT THE INCREASE IN PRICE WILL BE MORE THAN THE INCREASE IN DEMAND MEANING THAT THE LOSS IN THE TOTAL REVENUE WILL NOT BE WORTH THE INCREASE IN PRICE.

7
Q

IF DEMAND IS INELASTIC SHOULD A COMPANY INCREASE THE PRICE

A

IF THE DEMAND IS INELASTIC THEN IT MEANS THAT THE DEMAND FOR THE PRODUCT IS NOT SENSITIVE TO A CHANGE IN PRICE. THIS MEANS THAT THE REDUCTION IN DEMAND IS LIKELY TO BE LESS THAN THE INCREASE IN PRICE SO OVERALL THE COMPANY IS LIKELY TO EXPERIENCE AN INCREASE IN TOTAL REVENUE THAT WILL OUTWEIGH ANY REDUCTION IN DEMAND.