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 percentage changes 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 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 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
• How do demand curves differ based on elasticity?

  • Price inelastic demand: steep demand curve
  • Price elastic demand: shallow demand curve
  • Perfectly price inelastic: vertical line
  • Perfectly price elastic: horizontal line
• What factors determine if demand is price elastic or inelastic?

  • Number of substitutes (more substitutes = more elastic)
  • Percentage of income affected (larger percentage = more elastic)
  • Luxury vs. necessity (luxuries = more elastic)
  • Addictiveness of the good (addictive = more inelastic)
  • Time period (short run = more inelastic, long run = more elastic)
• What does the acronym SPLAT stand for in relation to demand elasticity?

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

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

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

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

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

  Short run demand is more inelastic than long run