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 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 value greater than 1 indicate?

  Demand is price elastic
• What does a PED value less than 1 indicate?

  Demand is price inelastic
• 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 factors affect whether demand is price elastic or inelastic?

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

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

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

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

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

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

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

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