PED

• What is price elasticity of demand?


  It measures how much the **quantity demanded** of a good changes in response to a change in its price.
• What does it mean if demand is elastic?


  If demand is elastic, a small change in price leads to a **larger change in quantity demanded**. The elasticity value is **greater than 1**.
• What does it mean if demand is inelastic?


  If demand is inelastic, a change in price leads to a **smaller change in quantity demanded**. The elasticity value is **less than 1**.
• What is unitary elasticity?


  Unitary elasticity occurs when the percentage change in quantity demanded is **equal** to the percentage change in price. The elasticity value is **exactly 1**.
• What factors influence price elasticity of demand?


  Factors include:

  • **Availability of substitutes**
  • **Necessity vs. luxury**
  • Proportion of income spent on the good
  • **Time period** (short-term vs. long-term)
• How is price elasticity of demand calculated?


  It is calculated using the formula:

  $E_d =$$\frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$
• What is an example of a good with elastic demand?


  **Luxury items** like designer handbags or vacations, as consumers can easily reduce consumption if prices rise.
• What is an example of a good with inelastic demand?


  **Essential goods** like insulin or gasoline, as consumers need them regardless of price changes.
• What does the basic law of demand state?

  Price increase leads to decreased quantity demanded
• What is the significance of price elasticity of demand (PED)?

  It measures responsiveness of quantity demanded to price changes
• What is the formula for calculating price elasticity of demand?

  PED = % change in quantity demanded / % change in price
• Why is the order of percentage changes important in the PED formula?

  Quantity demanded is on top, price on bottom
• What does a negative PED value indicate?

  Demand decreases as price increases
• What does it mean if demand is price elastic?

  Quantity demanded changes more than price change
• What does it mean if demand is price inelastic?

  Quantity demanded changes less than price change
• What is the result when demand is perfectly price inelastic?

  Quantity demanded does not change with price
• What is the result when demand is perfectly price elastic?

  Quantity demanded changes infinitely with price
• How do you calculate the percentage change in price?

  Difference in price divided by original price times 100
• What does a PED of -0.4 indicate about cigarette demand?

  Demand is price inelastic
• What does a PED of -4.5 indicate about sofa demand?

  Demand is price elastic
• How do demand curves differ based on elasticity?

  • Price inelastic: steep demand curve
  • Price elastic: shallow demand curve
  • Perfectly inelastic: vertical line
  • Perfectly elastic: horizontal line
• What factors determine if demand is price elastic or inelastic?

  • Number of substitutes
  • Percentage of income affected
  • Luxury vs necessity
  • Addictiveness of the good
  • Time period for demand adjustment
• What does the acronym SPLAT stand for in relation to demand elasticity?

  Substitutes, Percentage of income, Luxury, Addictiveness, Time
• How does the availability of substitutes affect demand elasticity?

  More substitutes lead to more elastic demand
• How does the percentage of income affected by a price change influence demand elasticity?

  Higher percentage leads to more elastic demand
• How does the nature of a good (luxury vs necessity) affect its demand elasticity?

  Luxuries are more elastic, necessities are inelastic
• How does addiction influence demand elasticity?

  Addictive goods tend to have inelastic demand
• How does the time period affect demand elasticity?

  Short run demand is inelastic, long run is elastic
• What is the relationship between price elasticity of demand and total revenue?

  • Price elastic demand: price decrease increases total revenue
  • Price inelastic demand: price decrease decreases total revenue
  • Unit elastic demand: total revenue remains unchanged