PED

• What does the basic law of demand state?

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

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

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

  Difference in price divided by original price times 100
• How do you calculate percentage change in quantity demanded?

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

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

  Demand is price elastic for sofas
• How do you draw demand curves 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?

  Substitutes, Percentage of income, Luxury/necessity, Addictive, Time period
• How do substitutes affect price elasticity of demand?

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

  Higher percentage leads to more price elastic demand
• How do luxuries and necessities differ in terms of price elasticity?

  Luxuries are more price elastic than necessities
• How does addiction affect price elasticity of demand?

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

  Demand is more elastic in the long run