1.2.5 Income elasticity of demand

• What does PED stand for in economics?

  Price Elasticity of Demand
• What happens to quantity demanded when price increases?

  It falls
• How is the Price Elasticity of Demand (PED) calculated?

  Using the formula for percentage change
• If the price of popcorn increases from £5 to £6, what is the percentage change in price?

  20%
• What is the percentage change in quantity demanded if the PED for popcorn is -0.8 and price increases by 20%?

  -16%
• Why is the PED value always negative?

  Due to the inverse relationship between price and quantity
• What are the interpretations of PED numerical values?

  • PED > 1: Elastic (luxury goods)
  • PED between 0 & 1: Inelastic (necessities)
• What does it mean if a product has a PED greater than 1?

  Demand is elastic
• What type of goods have a PED between 0 and 1?

  Inelastic goods
• How does brand loyalty affect PED?

  It makes demand more price inelastic
• What happens to PED for goods with fewer substitutes?

  PED is more price inelastic
• How does the proportion of income spent on a product affect its PED?

  Smaller proportions make demand more inelastic
• What is the effect of time on PED?

  Longer time periods increase price elasticity
• What is the significance of PED to businesses?

  • Adjust pricing strategy
  • Maximize revenue based on elasticity
• What happens to total revenue if demand is price inelastic and price is raised?

  Total revenue increases
• What is the effect on total revenue if demand is price elastic and price is raised?

  Total revenue decreases
• What are the characteristics of price elastic and inelastic demand?

  • Price Elastic Demand: PED > 1
  • Price Inelastic Demand: PED between 0 and 1