2.2 Firms, consumers and Elasticities of demand

• define and give the formula for Price elasticity of demand

  PED is the responsiveness of quantity demanded given a change in price.

  PED = Change in % QD / Change in % P
• if PED is less than 1 , will QD move to a larger or smaller extent than price

  A change in price will lead to a smaller change in the level of quantity demanded
• What does PED = 1 represent

  a unitary elastic good, whereby the change in price is equal to the change in quantity demanded
• if price increased by 22% and quantity demanded decreased by 30%, is the PED elastic or inelastic

  -30 / 22 = -1.36

  Therefore a PED elastic good
• 6 factors influencing elasticity of demand

  • necessity or want
  • substitutes or not
  • habitual consumption
  • proportion of income spent
  • durability
  • peak/off-peak demand
• How does the number of substitutes affect the elasticity of demand for the good

  the more substitutes there are, the more PED elastic the good is
• would peak demand for a good make it PED elastic or inelastic

  PED inelastic
• if good "A" is PED elastic and the price of the good increases, what happens to revenue

  the fall in quantity demanded is proportionally larger than the increase in price, so overall revenue falls
• price skimming

  short term pricing strategy that usually occurs when a new product is released, whereby a high price is set before new firms enter the market and increase competition
• how does predatory pricing differ from penetration

  predatory pricing aims to push incumbents out of the market, whereas price penetration aims to boost customer loyalty
• 3 factors that determine the most appropriate pricing strategy

  • number of USP
  • PED
  • stage in the product life cycle
• if good "A" has a high PED , will firms give it a high or low price, and why

  a low price because the good is dependent on price so if the good was expensive, firms profit margins would be at risk
• formula for income elasticity of demand

  YED = change in % QD / change in % of income
• inferior goods and give their YED value

  goods that experience a reduction in demand as income falls.

  YED less than 0.
• name the type of good with a YED greater than 1

  normal luxury goods
• during an economic recession, what type of goods are firms more likely to produce and why

  inferior goods, because recessions usually come with a reduction in income, so inferior goods will experience an increase in demand.