Topic 3 - Price determination in a competitive market

Define price elasticity of demand

Price elasticity of demand measures how responsive quantity demanded is to a change in price

What is the formula for price elasticity of demand?

% change in quantity demanded / % change in price

What type of number is price elasticity of demand?

Always negative

What is the range for elastic PED?

-1 to - infinity

What is the range for inelastic PED?

0 to -1

What is the range for unitary elastic PED?

-1

What does perfectly elastic demand mean?

Demand will be infinitely responsive to a change in price

What does perfectly inelastic demand mean?

Demand will not respond at all to a change in price

What is the range for perfectly elastic PED?

Negative infinity

What is the range for perfectly inelastic PED?

0

What factors influence PED?

1. Necessity

2. Addiction and habit

3. Availability of substitutes

4. Brand loyalty

5. Proportion of income

6. Time period

What does a change in price do to the demand curve?

Causes a movement

What are complementary goods?

Goods which are bought and used together

Define YED

The responsiveness of quantity demanded to a change in incomes

What will YED be for inferior goods?

Negative

What will YED be for a normal good?

Positive

What will YED be for necessities?

Between 0 and 1 (Inelastic)

What will YED be for luxuries?

Between 1 and infinity (elastic)

What will XED be for unrelated goods?

0

What will XED be for complements?

Negative

What will XED be for substitutes?

Positive

What is the formula for XED?

Percentage change in quantity demanded of good A / Percentage change in price of good B