1.2.3 Price Elasticity of Demand

    Cards (47)

    • What does Price Elasticity of Demand (PED) measure?
      Responsiveness of quantity demanded
    • The formula for calculating PED is \frac{\% \text{ change \in quantity demanded}}{\% \text{ change \in price}}
    • Elastic demand occurs when PED is greater than 1.
    • Match the PED value with its demand type and example:
      PED > 1 ↔️ Elastic demand, Airline tickets
      PED < 1 ↔️ Inelastic demand, Prescription drugs
      PED = 1 ↔️ Unit elastic demand, Basic commodities
    • Inelastic demand occurs when PED is less than 1
    • Unit elastic demand means the percentage change in quantity demanded equals the percentage change in price.
    • Classify the following items based on their PED values:
      1️⃣ Airline tickets (Elastic)
      2️⃣ Prescription drugs (Inelastic)
      3️⃣ Basic commodities (Unit elastic)
    • What happens to quantity demanded when the price of a product with elastic demand increases?
      Decreases significantly
    • Inelastic demand means a significant price change results in a minor change in quantity demanded.
    • Airline tickets are an example of a product with elastic demand.
    • Prescription drugs are an example of a product with inelastic demand.
    • What is the PED value for basic commodities that have unit elastic demand?
      1
    • Elastic demand means a small price change leads to a large change in quantity demanded.
    • Inelastic demand means a significant price change leads to a minor change in quantity demanded.
    • What does a PED value less than 1 indicate?
      Inelastic demand
    • The Price Elasticity of Demand (PED) is calculated as \frac{\% \text{ change \in quantity demanded}}{\% \text{ change \in price}}
    • A PED value greater than 1 indicates elastic demand.
    • What type of demand occurs when the quantity demanded changes proportionally with the price?
      Unit elastic
    • Unit elastic demand occurs when the PED value is equal to 1
    • Match the PED value with the type of demand:
      > 1 ↔️ Elastic
      < 1 ↔️ Inelastic
      = 1 ↔️ Unit Elastic
    • What is one factor that affects the elasticity of demand?
      Availability of substitutes
    • Necessities have inelastic demand, while luxuries have elastic demand.
    • Demand becomes more elastic over longer time periods.
    • Why is PED crucial for businesses?
      Informs pricing strategies
    • If lowering prices by 10% leads to a 20% increase in sales, revenue increases by 8%.
    • PED helps businesses decide whether to compete on price or quality.
    • What does a PED value of 1 indicate?
      Proportional change
    • Match the PED value with its corresponding demand type and example:
      > 1 ↔️ Elastic, Luxury Cars
      < 1 ↔️ Inelastic, Necessities
      = 1 ↔️ Unit Elastic, Basic Goods
    • Understanding PED is critical for businesses in pricing strategies and revenue management.
    • What is the first step in calculating PED?
      Find % change in quantity
    • If the price of a product increases by 10% and the quantity demanded decreases by 20%, the PED value is -2.
    • What does elastic demand imply about consumers?
      Sensitive to price changes
    • Inelastic demand means consumers are less responsive to price changes.
    • Match the PED value with its description and example:
      > 1 ↔️ Elastic, Designer Clothing
      < 1 ↔️ Inelastic, Medications
      = 1 ↔️ Unit Elastic, Basic Commodities
    • What is the definition of unit elastic demand (PED = 1)?
      Proportional change in demand
    • A small change in price for elastic demand (PED > 1) leads to a significant change in quantity demanded.
    • What characterizes inelastic demand (PED < 1)?
      Small change in demand
    • Match the PED value with its corresponding demand type:
      PED > 1 ↔️ Elastic Demand
      PED < 1 ↔️ Inelastic Demand
      PED = 1 ↔️ Unit Elastic Demand
    • Factors affecting PED in order of influence on demand elasticity:
      1️⃣ Availability of Substitutes
      2️⃣ Necessity vs. Luxury
      3️⃣ Proportion of Income Spent
      4️⃣ Time Period
      5️⃣ Brand Loyalty
    • More substitutes for a product make its demand more elastic.