PED

• What is the price elasticity of demand (PED)?

  Responsiveness of demand to price change
• What does a price elastic good indicate?

  Demand changes significantly with price
• What is the numerical value for a price elastic good?

  Greater than 1
• What characterizes a price inelastic good?

  Demand is relatively unresponsive to price
• What is the numerical value for a price inelastic good?

  Less than 1
• What does a unitary elastic good indicate?

  Change in demand equals change in price
• What is the numerical value for a unitary elastic good?

  Equal to 1
• What characterizes a perfectly inelastic good?

  Demand does not change with price changes
• What is the numerical value for a perfectly inelastic good?

  Equal to 0
• What characterizes a perfectly elastic good?

  Demand falls to zero with price change
• What is the numerical value for a perfectly elastic good?

  Infinity
• If the price of bread increases by 20% and quantity demanded decreases by 15%, what is the PED?

  • 0.75
• What does it mean if the absolute value of PED is less than 1?

  Good is deemed price inelastic
• What are the factors influencing price elasticity of demand (PED)?

  1. Necessity
  2. Substitutes
  3. Addictiveness or habitual consumption
  4. Proportion of income spent
  5. Durability of the good
  6. Peak and off-peak demand
• How does necessity affect PED?

  Necessary goods have relatively inelastic demand
• How do substitutes influence PED?

  More substitutes lead to more elastic demand
• How does addictiveness affect PED?

  Addictive goods have inelastic demand
• How does the proportion of income spent affect PED?

  Higher proportion leads to more elastic demand
• How does durability affect PED?

  Durable goods have more elastic demand
• How does peak and off-peak demand affect PED?

  Peak demand is more price inelastic
• What is the relationship between PED and total revenue?

  • Total revenue (TR) = Price (P) x Quantity (Q)
  • Inelastic demand: Price increase raises TR
  • Elastic demand: Price increase lowers TR
• What is the formula for total revenue?

  TR = P x Q
• What happens to total revenue if a firm raises price for an inelastic good?

  Total revenue increases
• What happens to total revenue if a firm raises price for an elastic good?

  Total revenue decreases