Demand and Consumer behaviour

• What is the price elasticity of demand (PED)?

  Responsiveness of demand to price change
• What does a price elastic good indicate?

  Demand changes significantly with price changes
• What is the numerical value for a price elastic good?

  Greater than 1
• What characterizes a price inelastic good?

  Demand is unresponsive to price changes

  
• What is the numerical value for a price inelastic good?

  Less than 1
• What does a unitary elastic good indicate?

  Demand change equals price change

  
• What is the numerical value for a unitary elastic good?

  Equal to 1
• What characterizes a perfectly inelastic good?

  Demand does not change with price changes

  
• What is the numerical value for a perfectly inelastic good?

  Equal to 0
• What characterizes a perfectly elastic good?

  Demand falls to zero with price changes

  
• What is the numerical value for a perfectly elastic good?

  Infinity
• If the price of bread increases by 15% and quantity demanded decreases by 20%, what is the PED?

  -1.33
• What does a negative PED value indicate about bread?

  Bread is relatively price inelastic
• What are the factors influencing price elasticity of demand (PED)?

  1. Necessity
  2. Substitutes
  3. Addictiveness or habitual consumption
  4. Proportion of income spent
  5. Durability of the good
  6. Peak and off-peak demand
• How does necessity affect PED?

  Necessities have relatively inelastic demand
• How do substitutes affect PED?

  More substitutes lead to more elastic demand
• How does addictiveness affect PED?

  Addictive goods have inelastic demand
• How does the proportion of income spent affect PED?

  Higher proportion leads to more elastic demand

  
• How does durability affect PED?

  Durable goods have more elastic demand
• How does peak and off-peak demand affect PED?

  Peak demand is more inelastic
• What is the relationship between PED and total revenue?

  • Inelastic demand: Price increase raises total revenue
  • Elastic demand: Price increase lowers total revenue
• What is the formula for total revenue?

  TR = P x Q
• What is income elasticity of demand (YED)?

  Responsiveness of demand to income change
• What are the types of goods based on income elasticity of demand?

  • Inferior goods: YED < 0
  • Normal goods: YED > 0
  • Luxury goods: YED > 1
• What characterizes inferior goods?

  Demand falls as income increases
• What characterizes normal goods?

  Demand increases as income increases
• What characterizes luxury goods?

  Demand increases more than income increases
• How do firms respond during economic growth regarding goods?

  Firms produce more luxury goods
• What is cross elasticity of demand (XED)?

  Responsiveness of demand for one good to price change of another
• What are the types of goods based on cross elasticity of demand?

  • Complementary goods: Negative XED
  • Substitutes: Positive XED
  • Unrelated goods: XED = 0
• What characterizes complementary goods?

  Negative XED; demand falls together
• What characterizes substitute goods?

  Positive XED; demand rises together
• What characterizes unrelated goods?

  XED equals zero; no effect on each other
• Why are firms interested in XED?

  To assess competition and price changes
• What do consumers aim to maximize when making economic decisions?

  Utility
• What do firms aim to maximize in economic decisions?

  Profits
• What is a consumer's utility?

  Total satisfaction from consuming goods
• What are heuristics in decision making?

  Shortcuts to simplify decision making
• Why do consumers use heuristics?

  To avoid long decision-making processes
• How might a consumer use common sense in decision making?

  By choosing sale items over regular prices