2.4 Price Elasticity of Demand

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

  Response to price changes
• The formula to calculate PED is PED
• If the elasticity coefficient is less than 1, demand is considered inelastic.
• What does an elasticity coefficient of -2 indicate?

  Elastic demand
• PED helps predict how price changes will affect sales
• PED varies based on the availability of substitutes and the necessity of the good.
• What is the formula to calculate PED?

  $PED =$ \frac{\text{% change \in quantity demanded}}{\text{% change \in price}}
• How many main categories of PED are there?

  Five
• Match the type of PED with its description:

  Perfectly Elastic ↔️ Infinite elasticity; quantity drops to zero with any price increase

  Elastic ↔️ Quantity changes more than price

  Unit Elastic ↔️ Quantity changes at the same rate as price

  Inelastic ↔️ Quantity changes less than price

  Perfectly Inelastic ↔️ Quantity does not change with price
• Perfectly elastic demand occurs when the elasticity coefficient is infinite
• What type of PED does brand-name clothing exemplify?

  Elastic
• Perfectly inelastic demand has an elasticity coefficient of 0
• What is an example of a good with perfectly elastic demand?

  Luxury travel services
• If the elasticity coefficient equals 1, the demand is unit elastic.
• One characteristic of PED is that it helps predict how price changes will affect sales
• If the price of coffee increases by 5% and the quantity demanded decreases by 15%, what is the PED?

  $- 3$
• A PED of -3 indicates that coffee has elastic demand.
• Match the type of demand with its response to price changes:

  Elastic ↔️ Significant change in quantity demanded

  Inelastic ↔️ Small change in quantity demanded
• What type of goods typically have inelastic demand?

  Essential goods
• Unit elastic demand means the quantity demanded changes at the same rate as the price
• Perfectly inelastic demand implies the quantity demanded does not change with price changes.
• What is an example of a good with perfectly inelastic demand?

  Life-saving surgery
• Elastic demand occurs when the elasticity coefficient is greater than 1
• What is the elasticity coefficient for perfectly elastic demand?

  Infinite
• Demand is considered elastic when the elasticity coefficient is greater than 1
• What type of demand has an elasticity coefficient equal to 1?

  Unit elastic
• Inelastic demand means that quantity demanded changes more than the price.

  False
• Perfectly inelastic demand has an elasticity coefficient of 0
• If a 10% price increase in airline tickets leads to a 30% decrease in tickets sold, what is the PED?

  $PED =$$- 3$
• If the price of insulin rises by 10% and quantity demanded remains unchanged, the demand is perfectly inelastic
• Understanding PED helps businesses predict the impact of price adjustments on sales volume and revenue.
• What happens to elasticity if there are many substitutes available?

  Increases
• Switching to tea if coffee prices increase is an example of the impact of substitutes
• What is the impact of necessity on elasticity?

  Decreases
• The demand for essential medicine is likely to be elastic.

  False
• Products that take up a significant portion of income are more price sensitive
• How does a longer time horizon affect elasticity?

  Increases
• Switching to a more fuel-efficient vehicle in response to high fuel prices is an example of elasticity over time.
• How does PED guide businesses in setting prices?

  Informed pricing strategies
• Lowering prices on elastic goods can increase sales volume