Price Elasticity Of Demand
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34 Terms
What does the law of demand state?
When price increases, quantity demanded falls, ceteris paribus.
What does Price Elasticity of Demand measure?
The responsiveness of quantity demanded to a change in price.
Why is PED important to economists and firms?
It helps predict how consumers react to price changes.
What is the formula for Price Elasticity of Demand?
PED=%ΔQD / %ΔP
How do you calculate % Change?
(New Value - Old Value) / Old Value x 100
What is perfectly inelastic demand?
Quantity demanded does not change at all when price changes.
What is the PED value for perfectly inelastic demand?
0
What does the demand curve look like?
Vertical
What is relatively inelastic demand?
Quantity demanded changes less than proportionally to price changes.
What PED values represent relatively inelastic demand?
0 < PED < 1
Give an example of relatively inelastic goods.
Addictive goods like cigarettes. - people still buy them even if price changes
What is unitary elasticity?
The percentage change in quantity demanded equals the percentage change in price.
What is the PED value at unitary elasticity?
1
What is relatively elastic demand?
Quantity demanded changes more than proportionally to price changes.
What PED values represent relatively elastic demand?
PED > 1
Give an example of relatively elastic goods.
Luxury Products
Why Are Luxury Goods Relatively Elastic?
they are non-essential, discretionary goods with high price points, allowing consumers to easily delay purchases, forego them, or switch to alternatives when prices rise
What is perfectly elastic demand?
Consumers will only buy at one price.
What PED value represents perfectly elastic demand?
Infinity
What does the demand curve for perfectly elastic look like?
horizontal
What is Total Revenue (TR)?
The total income a firm receives from sales.\
TR = Price x Revenue
What happens to total revenue if price falls and demand is elastic? Why?
Total revenue increases.
The increase in quantity demanded is proportionally larger than the price decrease.
What happens to total revenue if price rises and demand is inelastic? Why?
Total revenue increases.
The fall in quantity demanded is proportionally smaller than the price increase.
What is price discrimination?
Charging different prices to different consumers for the same product.
How do firms use PED in price discrimination? Give an Example.
Lower prices for elastic markets (to increase sales)
Higher prices for inelastic markets (to maximise revenue)
Train companies charge:
Higher peak fares (inelastic commuters)
Lower off-peak fares (elastic travellers)
How do substitutes affect PED?
More substitutes → more elastic demand.
Why are addictive goods price inelastic?
Consumers continue buying even if price rises.
How does the proportion of income affect PED?
Goods that take a small share of income have inelastic demand.
Why is demand more elastic in the long run?
Consumers have time to find substitutes or change behaviour.
What does a steep demand curve indicate?
Inelastic demand
What does a shallow demand curve indicate?
Elastic demand
If PED > 1, demand is...?
Elastic
If PED < 1, demand is...?
Inelastic
What happens to total revenue when price rises and demand is elastic?
Total revenue falls.