Price elasticity of demand

• What is the abreviated form of price elasticiy of demand ?

  PED
• What is the price elasticity of demand?

  The responsiveness of quantity demanded of a product to a change in price
• What is the formula for price elasticity of demand?

  Percentage change in quantity demanded/percentage change in price
• What value does the price elasticity of demand have and why?

  It will always have a negative value because price and quantity move in opposite directions as the demand curve is donward sloping
• How does availability of substitutes affect price elasticity of demand?

  If substitutes are available there will be a strong incentive to shift consumption to them when the prices of the product rises - the existence of substitutes therefore tends to make demand for the product elastic
• How does the proportion of income spent on a product affect price elasticity of demand?

  If a small percentage of income is spent on a product, then demand tends to be inelastic, but if a large percentage of income is spent on a product, then demand tends to be elastic
• How does the nature of a product affect price elasticity of demand?

  If the product is addictive then demand tends to be inelastic
• How does the durability of the product affect price elasticity of demand?

  If the product lasts for a long time, then demand is relatively elastic, however, if a product lasts for a short time, then demand tends to be inelastic as it needs to be replaced reguarly
• How does the length of time under consideration affect price elasticity of demand?

  It usually takes time for consumers to adjust their expenditure patterns following a price change - consequently, demand is usually more price elastic in the long run than the short run
• What is the relationship between price elasticity of demand and total revenue in elastic demand?

  A price change causes total revenue to change in the opposite direction
• What is the relationship between price elastcity of demand and total revenue in inelastic demand?

  A price change causes total revenue to change in the same direction
• What is the relationship between price elasticity of demand and total revenue in unitary elastic demand?

  A price change causes total revenue to remain the same
• What is the relationship between price elasticity of demand and total revenue in perfectly elastic demand?

  A price rise causes total revenue to fall to 0
• What is the relationship between price elasticity of demand and total revenue in perfectly inelastic demand?

  A price change cuases total revenue to change in the same direction by the same proportion
• Why is PED significant for firms?

  If firms know that demand for their product is price inelastic than they can increase total revenue by increasing price - however, if firms know that demand is price elastic, they can increase total revenue by decreasing the price
• Why is PED significant for consumers?

  If demand is price inelastic than firms may raise prices to increase their total revenue, but this would reduce the real incomes of consumers
• Why is PED significant for the government?

  If the government wishes to maximise its tax revenue than it will place indirect taxes on those products whose demand is price inelastic - the government may also tax products and services whose demand is price elastic, though this may make some firms unprofitable
• What is price elastic demand?

  When a change in price has led to a larger percentage change in quantity demanded
• What is the value of PED in price elastic demand?

  The value of PED will be less than -1, and the demand curve will be almost horizontal
• What is price inelastic demand?

  When a change in price has led to a smaller percentage change in quantity demanded
• What is the value of PED in price inelastic demand?

  The value of PED will be between 0 and -1, and the demand curve will be almost vertical
• What is unitary elastic demand?

  When a change in price has led to the same percentage change in quantity demanded
• What is the value of PED in unitary elastic demand?

  The value of PED will be 1, and the demand curve will be a negative curve
• What is perfectly elastic demand?

  When a small increase in price has led to the quantity demanded to fall to 0
• What is the value of PED in perfectly elastic demand?

  The value of PED will be infinity, and the demand curve will be horizontal
• What is perfectly inelastic demand?

  When a change in price doesn't affect quantity demanded
• What is the value of PED in perfectly inelastic demand?

  The value of PED will be 0, and the demand curve will be vertical