Price elasticities of demand

Cards (15)

  • 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 completely unresponsive 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 increase prices 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 less responsive 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)