PED

• What does price elasticity of demand measure?

  Responsiveness of demand to price changes
• What is the formula for calculating price elasticity of demand (PED)?

  PED = %ΔQD / %ΔP
• What characterizes a price elastic good?

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

  Greater than 1
• What defines a price inelastic good?

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

  Less than 1
• What does unitary elastic mean in terms of PED?

  Change in demand equals change in price
• What is the PED 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 PED value for a perfectly inelastic good?

  Equal to 0
• What defines a perfectly elastic good?

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

  Infinity
• What does a negative PED value indicate about a good?

  It is relatively price inelastic
• What are the categories of price elasticity of demand?

  • Price elastic: PED > 1
  • Price inelastic: PED < 1
  • Unitary elastic: PED = 1
  • Perfectly inelastic: PED = 0
  • Perfectly elastic: PED = infinity
• What is a necessary good example?

  Bread
• How does the demand for necessary goods respond to price increases?

  It remains relatively inelastic
• What type of goods are more elastic?

  Luxury goods
• What happens to the demand for flights if their prices increase?

  Demand is likely to fall significantly
• What effect do substitutes have on demand elasticity?

  They make demand more price elastic
• What is the relationship between the availability of substitutes and demand elasticity?

  More substitutes lead to more elastic demand
• How does demand elasticity change in the long run compared to the short run?

  Demand becomes more elastic in the long run
• What is an example of a good with inelastic demand due to addiction?

  Cigarettes
• Why is the demand for cigarettes not sensitive to price changes?

  Consumers are addicted to them
• How does the proportion of income spent on a good affect its demand elasticity?

  Higher proportion leads to more elastic demand
• What happens to demand for a magazine if its price increases from £1.50 to £2?

  Demand is likely to be relatively inelastic
• How does the price increase of a car from £15,000 to £20,000 affect its demand?

  Demand is likely to be more price elastic
• What type of good has more elastic demand due to its durability?

  Washing machine
• Why does the demand for washing machines become more elastic?

  Consumers wait to buy another one
• When is the demand for train tickets more price inelastic?

  During peak times
• What is the demand for train tickets like during off-peak times?

  It is more price elastic
• What does the burden of an indirect tax depend on?

  Elasticity of demand for the good
• How do taxes affect the supply curve?

  Taxes shift the supply curve to the left
• What happens to the price and quantity when a firm with inelastic demand faces a tax increase?

  Price increases and quantity decreases
• Why do firms with inelastic demand pass most of the tax burden to consumers?

  Price increases do not significantly reduce demand
• What is the effect of a tax on a good with elastic demand?

  Firms bear most of the tax burden
• Why is raising government revenue less effective with elastic demand?

  Higher prices lead to a significant drop in demand
• What is the impact of a subsidy on supply?

  It increases supply by shifting the curve right
• How does a subsidy benefit producers and consumers?

  Increased revenue for producers and lower prices for consumers
• What are the effects of taxes and subsidies on demand and supply?

  • Taxes shift supply curve left, increasing prices
  • Inelastic demand leads to consumer tax burden
  • Elastic demand leads to producer tax burden
  • Subsidies shift supply curve right, lowering prices
  • Benefits both producers (increased revenue) and consumers (lower prices)
• What is the formula for total revenue?

  TR = P x Q