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Theme 1: Marketing and People
1.2 The Market
1.2.3 Price Elasticity of Demand
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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
.
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