PED

• How does price affect demand according to the video?


  Price influences the quantity demanded, causing changes in demand when prices change
• What happens to demand if the price of a product increases by 20%?


  Demand may decrease or consumers may switch to alternatives
• What does price elasticity of demand measure?


  It measures the extent to which quantity demanded changes in response to a change in price
• How is price elasticity of demand (PED) calculated?


  PED is calculated by dividing the percentage change in quantity demanded by the percentage change in price
• If the price of product X increases from £4 to £5, what is the percentage change in price?


  25%
• If the quantity demanded of product X falls from 1,000 units to 800 units, what is the percentage change in quantity demanded?


  • 20%
• What does a PED of 0.8 indicate about the product's demand?


  The demand is inelastic, meaning the percentage change in demand is less than the percentage change in price
• What are the implications of a product being price elastic?


  • If price increases, demand decreases significantly
  • Revenue may decrease if price is raised
  • Consumers are sensitive to price changes
• What are the implications of a product being price inelastic?


  • If price increases, demand decreases less significantly
  • Revenue may increase if price is raised
  • Consumers are less sensitive to price changes
• What types of products tend to have price inelastic demand?


  Heavily branded products and necessities
• Why do products with strong brand loyalty tend to be price inelastic?


  Customers remain loyal and do not significantly reduce demand despite price increases
• What factors influence whether a product has elastic or inelastic demand?


  Availability of substitutes, brand loyalty, necessity of the product, and habitual consumption
• If Cadbury Twirl increases its price by 20%, what might a consumer do?


  Look for an alternative like a Twix or Mars bar
• Why do newspapers often engage in price wars?


  Customers are sensitive to the price they pay for daily news
• What is an example of a product with price inelastic demand?


  Tobacco products
• How does the necessity of a product affect its price elasticity?


  Necessities tend to have inelastic demand as consumers will continue to buy them despite price increases
• What happens when a price inelastic product becomes elastic due to high prices?


  Demand may decrease significantly as consumers start to seek alternatives
• What is the key takeaway regarding the calculation of price elasticity of demand?


  • Calculate percentage changes in quantity demanded and price
  • Compare the elasticity value to 1
  • Understand implications for revenue and demand sensitivity
• What does price elasticity of demand measure?

  The responsiveness of demand after a change in price
• What is the basic formula for calculating the coefficient of elasticity?

  The percentage change in quantity demanded divided by the percentage change in price
• Why do we usually not include the minus sign in the price elasticity of demand calculation?

  Because changes in price and quantity usually move in opposite directions
• What does a price elasticity of demand (PED) of zero indicate?

  Demand is perfectly inelastic
• What does a coefficient value between zero and one indicate about demand?

  Demand is inelastic and relatively unresponsive to price changes
• What does a coefficient of one mean in terms of price elasticity of demand?

  Demand is unitary elastic
• What happens to total spending when demand is unitary elastic?

  Total spending remains the same at each price level
• What does a coefficient of PED greater than one indicate?

  Demand is price elastic and responds more than proportionately to price changes
• If the price increases by 10% and demand drops by 30%, what is the coefficient of price elasticity?


  3
• What is the most important factor that shapes the value of price elasticity?

  The number of close substitutes available
• How do close substitutes affect the elasticity of demand?

  The more close substitutes available, the more elastic the demand
• How does the price of a product relative to consumer income affect demand elasticity?

  Products that take up a high percentage of income tend to have more elastic demand
• What effect does the cost of switching between products have on demand elasticity?

  High switching costs tend to make demand inelastic
• How does brand loyalty affect price elasticity of demand?

  Strong brand loyalty makes demand less elastic
• What is the relationship between necessity and luxury goods and their elasticity?

  Necessities tend to have inelastic demand, while luxuries tend to have more elastic demand
• How does the breadth of definition of a good affect its elasticity?

  The demand for broad categories like petrol is often inelastic, while specific brands may be more price sensitive
• What is the relationship between elasticity of demand and total revenue?

  • Total revenue = price per unit × quantity
  • If demand is elastic, a price decrease increases total revenue
  • If demand is inelastic, a price decrease decreases total revenue
  • If demand is unitary elastic, total revenue remains unchanged
• If the price is cut from £20 to £18 and demand increases by 50 units, what happens to total revenue?

  Total revenue increases by £500
• What is the price elasticity of demand when the price is cut from £16 to £14 and demand increases by 50 units?


  1. 3
• What happens to total revenue when the price falls from £1 to £0.10 and demand increases by 50 units?

  Total revenue goes down
• What does a demand curve with a coefficient of elasticity less than one indicate?

  Demand is price inelastic
• What happens to revenue when a firm increases the price on an inelastic demand curve?

  Revenue increases