PED

• What does the basic law of demand state?

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

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

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

  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 perfectly price inelastic demand?

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

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

  Difference in price / original price × 100
• How do you calculate percentage change in quantity demanded?

  Difference in quantity demanded / original quantity × 100
• What does a PED value of less than 1 indicate?

  Demand is price inelastic
• What does a PED value greater than 1 indicate?

  Demand is price elastic
• What does a PED value of zero indicate?

  Demand is perfectly price inelastic
• What does a PED value of infinity indicate?

  Demand is perfectly price elastic
• What happens to quantity demanded when the price of cigarettes increases from £4 to £5?

  Quantity demanded decreases by 10%
• What is the percentage change in price when it increases from £4 to £5?

  25% increase in price
• What is the percentage change in quantity demanded for cigarettes when price increases?

  10% decrease in quantity demanded
• What does a PED value of -0.4 indicate for cigarette demand?

  Demand is price inelastic
• What happens to quantity demanded when the price of a sofa decreases from £1,000 to £800?

  Quantity demanded increases by 90%
• What is the percentage change in price when it decreases from £1,000 to £800?

  20% decrease in price
• What does a PED value of -4.5 indicate for 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 does the acronym SPLAT stand for in demand elasticity?

  • S: Substitutes
  • P: Percentage of income
  • L: Luxury or necessity
  • A: Addictive goods
  • T: Time period
• How do substitutes affect demand elasticity?

  More substitutes lead to more elastic demand
• How does the percentage of income affect demand elasticity?

  Higher percentage leads to more elastic demand
• How do luxuries and necessities affect demand elasticity?

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

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

  Short run demand is inelastic, long run is elastic
• What is the link between PED and total revenue?

  • Price elastic demand: price increase decreases total revenue
  • Price inelastic demand: price increase increases total revenue
  • Unit elastic demand: total revenue remains constant