Elasticity of Demand and Supply

Flashcards covering key concepts of elasticity in demand and supply, including definitions, calculations, impacts, and applications.

What is Price Elasticity of Demand (PED)?

PED measures the responsiveness of quantity demanded of a good or service due to a change in its price, ceteris paribus.

How is PED calculated?

PED is calculated by dividing the percentage change in quantity demanded by the percentage change in price.

What does a PED value greater than 1 indicate?

Demand is price elastic; quantity demanded changes more than proportionately to a price change.

What does a PED value less than 1 indicate?

Demand is price inelastic; quantity demanded changes less than proportionately to a price change.

What is the significance of the sign of PED?

The negative sign indicates the inverse relationship between price and quantity demanded, consistent with the Law of Demand.

What factors can affect the size of PED for a good?

Factors include: number & closeness of substitutes, proportion of income spent, degree of necessity, habit, and time period.

What happens to total revenue when price decreases and PED > 1?

Total revenue increases.

What happens to total revenue when price decreases and PED < 1?

Total revenue decreases.

What does 'perfectly inelastic demand' mean?

PED = 0; quantity demanded does not change regardless of price change.

What does 'perfectly elastic demand' mean?

PED = ∞; quantity demanded changes infinitely in response to any price change.

How do firms use PED in pricing decisions?

Firms analyze PED to determine how changes in price will affect total revenue and adjust pricing strategies accordingly.