Price elasticity of demand

• What is the relationship between price and demand for a product?


  There is a negative relationship between the price of a product and the amount that will be demanded.
• What does it mean if a product is price inelastic?


  It means that a change in price has a very small impact on demand.
• What characterizes price elastic products?


  They are easily replaced, non-essential, and cheap to switch.
• How is price elasticity of demand (PeD) calculated?


  PeD is calculated by dividing the % change in quantity demanded by the % change in price.
• What does a PeD value of -0.1 indicate?


  It indicates that the product is price inelastic in demand.
• If the price of petrol rises from £1 to £1.50 and demand falls from 20 litres to 19 litres, what is the % change in demand?


  • 5%
• If the price of petrol rises from £1 to £1.50, what is the % change in price?

  50%
• What does a PeD score between 0 and -1 signify?


  It signifies that the product is price inelastic in demand.
• What happens to revenue when the price of an inelastic product is increased?


  Revenue will rise when prices rise.
• If a firm sells product A for £5 and product B for £2, and increases the price of product A to £6 and product B to £2.40, what is the impact on revenue for product A?


  Revenue increases from £500 to £510.
• If the price of product C decreases from £100 to £80 and demand rises by 10%, what is the PeD for product C?


  • 0.5
• What does a PeD score lower than -1 indicate?


  It indicates that the product is price elastic in demand.
• If a firm decreases the price of product G from £4 to £3 and demand rises by 60%, what is the PeD for product G?


  • 2.4
• What are the key rules regarding PeD scores?


  • A PeD score between 0 and -1 is inelastic.
  • Revenue will rise when prices rise for inelastic products.
  • A PeD score lower than -1 is elastic.
  • Revenue will rise when prices fall for elastic products.
• What factors can affect the strictness of PeD rules?


  • Time of year (e.g., ice cream demand in summer vs. winter)
  • Time period (e.g., immediate vs. eventual switching)
  • New technology (e.g., electric cars affecting petrol demand)
  • Frequency of price changes (e.g., impact of frequent price changes)