PED

• What does price elasticity of demand measure?

  Responsiveness of demand to price changes
• What is the basic formula for calculating the coefficient of elasticity?

  Percentage change in quantity demanded divided by price change
• Why do we usually not include the minus sign in elasticity calculations?

  Price and quantity usually move in opposite directions
• What coefficient value indicates perfectly inelastic demand?

  Zero
• What does a coefficient value between zero and one indicate?

  Demand is inelastic and relatively unresponsive
• What does a coefficient of one signify about demand?

  Demand is unitary elastic
• What happens to total spending when demand is unitary elastic?

  Total spending remains the same at each price level
• What does a coefficient of price elasticity greater than one indicate?

  Demand is price elastic and responds more than proportionately
• If the price increases by 10% and demand drops by 30%, what is the coefficient of elasticity?


  3
• What is a key factor that shapes the price elasticity of a product?

  Number of close substitutes available
• How do close substitutes affect demand elasticity?

  More substitutes lead to more elastic demand
• How does the price of a product relative to income affect demand elasticity?

  Higher percentage of income leads to more elastic demand
• What effect does the cost of switching products have on demand elasticity?

  Higher switching costs lead to inelastic demand
• How does brand loyalty affect price elasticity of demand?

  Strong brand loyalty makes demand less elastic
• What is the relationship between necessity and luxury goods and their demand elasticity?

  Necessities tend to have inelastic demand, luxuries elastic
• How does the breadth of definition of a good affect its demand elasticity?

  Broader definitions may lead to inelastic demand
• What is the relationship between elasticity of demand and total revenue?

  • Total revenue = price per unit × quantity
  • Elastic demand: price decrease increases total revenue
  • Inelastic demand: price decrease decreases total revenue
  • Unitary elastic: total revenue remains unchanged
• If the price is cut from £20 to £18 and demand increases by 50 units, what happens to total revenue?

  Total revenue increases by £500
• What is the price elasticity of demand if the price is cut from £16 to £14 and demand increases by 50 units?


  1. 3
• What happens to total revenue when the price falls from £1 to £10 and demand increases by 50 units?

  Total revenue decreases
• What does a vertical demand curve indicate about price elasticity?

  Demand is perfectly inelastic
• What does a perfectly elastic demand curve indicate about price changes?

  Demand can only be sold at one price
• What is a unitary elastic demand curve?

  Percentage change in price equals percentage change in quantity
• How does elasticity of demand vary along a linear demand curve?

  Elasticity changes even if the curve looks straight
• Why is understanding elasticity useful for producers?

  It helps in pricing strategies and revenue management
• How does elasticity affect the ability to pass on indirect taxes to consumers?

  Elasticity determines extent of tax burden on consumers
• What is price discrimination in relation to elasticity of demand?

  Charging different prices based on consumer elasticity
• How does the elasticity of demand vary by region and time period?

  Elasticity can differ significantly across regions and times
• How do premium and economy products differ in terms of elasticity?

  Premium products may have inelastic demand, economy products elastic