2.2.1 Price Elasticity of Demand (PED)

• What does Price Elasticity of Demand (PED) measure?

  Responsiveness to price changes
• If the price of a product increases by 10%, and the quantity demanded decreases by 20%, what is the PED value?

  -2
• Match the PED value with its demand characteristic:

  PED < 1 ↔️ Inelastic Demand

  PED > 1 ↔️ Elastic Demand

  PED = 1 ↔️ Unit Elastic Demand
• What does elastic demand imply about consumer responsiveness to price changes?

  Highly responsive
• Unit elastic demand means demand changes proportionally with price changes.


  True
• How does the availability of substitutes affect the PED of a good?

  Makes demand more elastic
• Demand for essential goods is more inelastic
• What does PED stand for?

  Price Elasticity of Demand
• Demand for necessary goods is more inelastic.


  True
• Demand is more elastic in the long run because consumers have more time to adjust
• What is the implication of elastic demand (PED > 1)?

  Demand is responsive to price
• A 1% change in price for an elastic good leads to a greater than 1% change in quantity demanded.


  True
• Unitary elastic demand occurs when PED equals one
• What is the formula for calculating PED?

  \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}}</latex>
• What visual aid is used to illustrate the impact of a price change on quantity demanded?

  Pie chart
• What is the implication of elastic demand in terms of pricing strategy?

  Lower prices to increase demand
• If PED is -2, the demand is considered elastic
• Demand is more elastic if close substitutes are available
• What happens to demand elasticity when the proportion of income spent on a good increases?

  Demand becomes more elastic
• What is the PED value for elastic demand?

  PED > 1
• Unitary elastic demand occurs when PED equals 1
• How can businesses use PED to predict the impact of price changes?

  Forecast consumer demand
• Steps in optimizing pricing strategies using PED

  1️⃣ Determine the type of PED for the product

  2️⃣ Forecast the impact of price changes

  3️⃣ Adjust prices to maximize revenue
• What happens to revenue when demand is unitary elastic and prices change?

  Revenue remains constant
• Why is understanding PED important for businesses?

  Maximize profitability
• The formula for calculating PED is `PED = % Change in Quantity Demanded / % Change in Price
• A PED value of -2 indicates that demand is elastic.


  True
• Inelastic demand occurs when the PED value is less than 1
• Arrange the factors affecting PED in terms of their impact on elasticity:

  1️⃣ Availability of Substitutes: More substitutes lead to more elastic demand

  2️⃣ Necessity of the Good: Necessary goods are more inelastic

  3️⃣ Proportion of Income Spent: Higher proportion leads to more elastic demand

  4️⃣ Time Period: Longer time allows for more elastic demand
• Goods that constitute a larger proportion of income have more elastic demand.


  True
• Demand is more elastic if close substitutes are available
• What happens to PED when goods make up a larger proportion of consumer income?

  Demand becomes more elastic
• Match the PED value with its demand characteristic:

  PED > 1 ↔️ Elastic Demand

  PED < 1 ↔️ Inelastic Demand

  PED = 1 ↔️ Unitary Elastic Demand
• What is the implication of unitary elastic demand (PED = 1)?

  Demand changes proportionally with price
• What happens to demand for an inelastic good when its price changes?

  Demand changes less than price
• PED measures the responsiveness of quantity demanded to changes in price.


  True
• If PED is -2, the demand is considered elastic
• Order the types of PED from most responsive to least responsive to price changes:

  1️⃣ Elastic Demand (PED > 1)

  2️⃣ Unitary Elastic Demand (PED = 1)

  3️⃣ Inelastic Demand (PED < 1)
• The PED value is negative because price and quantity demanded move in opposite directions.


  True
• Which factor affects PED by giving consumers more time to adjust to price changes?

  Time period