Price Elasticity of Demand

What is elasticity?

The responsiveness of one variable to changes in another

What does elasticity measure?

The extent to which demand changes

What do economists use percentage change to measure?

Responsiveness

Why do economists use percentage change to measure to responsiveness?

To compare quantities with prices

What is the formula for PED?

% change in QD/% in price

What type of relationship do price and demand have?

Inverse

Because of the inverse relationship between price and demand, what does this mean can be ignored in the final answers?

Negative signs

What is the equation for % change?

(New-original/original) x 100

If PED is 0 then what is demand?

Perfectly inelastic

If PED is between 0 and 1 then what is demand?

Inelastic

If PED is 1 then what is demand?

Unit elastic

If PED is greater than 1 then what is demand?

Elastic

What does perfectly inelastic mean?

Demand does not change when the price changes

What does elastic mean?

Demand responds more than proportionately to a change in price

What is the equation for PED?

% change in quantity demanded/ % change in price

What sort of relationship does price and demand have?

Inverse

What can be ignored when giving the answers for PED?

The negative sign

When the percentage change in demand is greater than the percentage change in price what is demand?

Elastic

When the percentage change in price is greater than the percentage change in demand what is demand?

Inelastic

If a customer reacts to a change in price what are they?

Elastic

If a customer does not react to a change in price what are they?

Inelastic

What 3 factors make us insensitive to a change in price?

• Addiction/habits

• Brand loyalty

• Large disposable income

What 3 factors make us sensitive to a change in price?

• Lots of substitutes

• Easy to switch brands

• Off peak