PED - Unit 1 Year 11 Econs

Summary of PED

Measures the responsiveness of the quantity of a good demanded to a change in only price, ceteris paribus

List elasticity ranges

0 to -1 = Price inelastic, -1 to infinity = Price elastic, -1 = Unit price elastic

How do we define price elastic demand?

When a price change results in a more than

proportionate change in qty demanded, dd

is price elastic.

How do we define price inelastic demand?

When a price change results in a less than proportionate change in qty demanded, dd

is price inelastic.

When dd is price elastic, the slope

of the dd curve is?

More gentle

When dd is price inelastic, the slope

of the dd curve is

More steep

How do we define unit price elastic demand?

When a price change results in a

proportionate change in qty demanded, dd

is unit price elastic.

How do we define perfectly price elastic demand?

When a price change results in an infinitely

large change in qty demanded, dd is

perfectly price elastic.

How do we define perfectly price inelastic demand?

When a price change results in zero change in qty demanded, dd is perfectly price inelastic.

What are the 5 factors affecting PED for a good

1. Number & closeness of substitutes in the

same price range

2. Time Period

3. Proportion of Income consumers spend on a

good

4. Degree of necessity of the good to the

consumers

5. Habit of the consumer

Explain how number & closeness of substitutes in the same price range effects PED

The larger the number of substitutes(in

the same price range), the higher the PED.

Explain how time period effects PED

The longer the time period, the higher

the PED.

Explain how a lower proportion of income consumers spend on the good effects PED

The lower the proportion of income spent

on the good, the lower the PED.

If price increases, qty demanded will decrease

less than proportionately. Since it’s less responsive to price changes, no incentive to look for substitutes.

Therefore, demand is price inelastic

Explain how the higher the degree of necessity of a good to a consumer effects PED

The higher the degree of necessity, the

lower the PED.

If price increases, qty demanded will decrease

less than proportionately. Therefore, less responsive to price changes.

Demand is price inelastic

Explain how consumer habits impact PED

If the goods are consumed out of habit, increase in price leads to less than proportionate fall in Qd

What is the formula for TR? (total revenue)

TR = P (price x Q (Quantity)

If the demand for a good is elastic, how would an increase in price effect TR for producers?

It would decrease TR due to a higher than proportionate decrease in sales compared to increase in revenue.