What is price elasticity of demand and its formula?
Price elasticity of demand reveals how responsive the change in quantity demanded is to a change in price
PED = percentage change of QD in good X / percentage change in price of good Y
What does it mean when the price elasticity of demand is perfectly inelastic?
Value = 0
The QD is completelyunresponsive to a change in price
What does it mean when the price elasticity of demand is inelastic?
Value= PED<1
The %∆ in QD is less than proportional to the %∆ in Price
What does it mean when the price elasticity of demand is unitary elastic?
Value = 1
The % ∆ in QD is exactly equal to the %∆ in P
What does it mean when PED is elastic
Value = PED >1
The %∆ in QD is more than proportional to the %∆ in P (e.g. luxury products)
What does it mean when PED is perfectly elastic
Value = infinity
The %∆ in QD will fall to zero with any %∆ in P (highly theoretical elasticity)
If a product is price elastic, what should a firm do to maximise revenue?
If their product is price elastic in demand, they should decrease their prices
When a good/service is price elastic in demand, there is a greater than proportional increase in the quantity demanded to a decrease in price
A small decrease in price leads to a larger increase in QD
TR is higher once the price has been decreased
(P2xQ2)>(P1xQ1)
If a product is price inelastic, what should a firm do to maximise revenue?
If their product is price inelastic in demand, they should raise their prices
When a good/service is price inelastic in demand, there is a smaller than proportional decrease in the quantity demanded to an increase in price
A large increase in price leads to a smaller decrease in QD
TR is higher once the price has been increased
(P2xQ2)>(P1xQ1)
What is total revenue?
Price x quantity
What is price discrimination?
When firms choose to use price discrimination to maximise their revenue
They lower their prices for elastic sections of their market e.g. off peak train travel
They increaseprices for inelastic sections of their market e.g. peak hour train trave
What are the factors that influence PED?
Availability of substitutes
Addictiveness of the product
Price of product as a proportion of income
Time period
necessity of good/service
How does availiabilty of subsitutes affect PED?
Availability of substitutes: good availability of substitutes results in a higher value of PED (relatively elastic)
How does addictiveness of the product affect PED?
Addictiveness of the product: addictiveness turns products into necessities, resulting in a low value of PED (relatively inelastic)
How does price of product as a proportion of income affect PED?
Price of product as a proportion of income: the lower the proportion of income the price represents, the lower the PED value will be. Consumers are lessresponsive to price changes on cheap products (relatively inelastic)
How does time period affect PED?
Time period: In the short term, consumers are less responsive to price increases, resulting in a low value of PED (relatively inelastic). Over a longer period of time, consumers may feel the price increase more and will then look for substitutes, resulting in a higher value of PED (relatively elastic)