Theme 1.2 - Price Elasticity of Demand Flashcards
What does PED measure?
How responsive quantity demanded is to changes in price (Change in demand due to change in price)
What is the PED equation?
%Change in quantity demanded/
%Change price
What elasticity do the following numbers represent for PED; 0,<1,1,>1
0 - Perfectly Inelastic
>1 - Price Elastic
1 - Unitary Elastic
<1 - Price Inelastic
What does it mean if a product is perfectly PED inelastic?
Price doesn’t affect demand
As the value increases, what happens to elasticity?
Increases
Higher number, more price elastic the demand is
Why will the answer always be negative when calculating PED?
Inverse relationship between price + demand
When price rises, demand falls
What is PED affected by?
Substitutes
Time
Necessities + Luxuries
% of income allocated to purchasing good
Cost of switching
How do substitutes affect PED?
More substitutes, more elastic
How does time affect PED?
Elasticity increases over time
How do necessities + luxuries affect PED?
Necessities tend to be inelastic
Luxuries tend to be elastic
How does % income allocated affect PED?
Higher %, more elastic the demand
How does cost of switching affect PED?
Lower the cost, more elastic the demand
What are the uses of PED?
Helps firms determine optimum price
Firms can decide whether to in/decrease price
Calculate impact of change in price on sales revenue
Firms can decide non-price strategies for increasing demand
What are the limitations of PED?
Values based on estimates
Information may become outdated
Other factors may shift demand curve (QD affect cancelled)
Data only useful in short term (Elasticity increases over time)
Ignores any cost data
