PED

• What is price elasticity of demand?


  A measure of the responsiveness of quantity demanded given a change in price.
• How is PED calculated?


  PED = % change in quantity demanded / % change in price
• How is percentage change calculated?


  % change = (new - old) / old x 100
• What value is PED?


  Always negative.
• What does it mean if PED is elastic, what are the values and what would a diagram look like?


  • Change in price leads to a more than proportionate change in quantity demanded.
  • Between -1 and -infinity.

  
• What does it mean if PED is inelastic, what are the values and what does the diagram look like?


  • Change in price leads to a less than proportionate change in quantity demanded.
  • Between -1 and 0.

  
• What is the value of PED if its perfectly price elastic?


  -infinity

  
• What is the value of PED if its perfectly price inelastic?


  0

  
• What characteristics do goods with elastic demand have?


  • S: more substitutes.
  • P: greater % of income.
  • L: luxury.
  • A: not addictive.
  • T: long run.
• What characteristics do goods with inelastic demand have?


  • S: few substitutes.
  • P: smaller % of income.
  • L: necessity.
  • A: addictive.
  • T: short run.
• How is total revenue calculated?


  price x quantity sold
• What is the relationship between total revenue and goods with elastic demand?


  Inverse - price increases, rev. decreases
• What is the relationship between total revenue and goods with inelastic demand?


  Direct - price increases, rev. increases.
• What's useful about PED?


  • Allows firms to make pricing decisions to increase total revenue.
  • Help firms w/ sales forecasting.
  • Can use price discrimination for 2 distinct groups of customers.
• What are some limitations to PED?


  • Calculations are only estimates and could be incorrect.
  • Assuming ceteris paribus can be misleading.