Elasticity

Question 1

What does price elasticity of demand measure

Answer 1

How much demand changes when price changes

Question 2

What is the formula of price elasticity of demand

Answer 2

% change in quantity demanded
———————————————-
% change in price

Question 3

What does a PED> 1 mean in terms of elasticity

Answer 3

Demand is elastic in which customers respond strongly

Question 4

What does PED< 1 mean in terms of elasticity

Answer 4

PED is inelastic in which customers respond weakly

Question 5

What does a PED of 1 mean

Answer 5

PED is unit elastic

The relationship between demand and price is equal

For example

If there is 20% decrease in price there is a 20% increase in demand

Question 6

What is the key influences on PED and explain how they influence PED

Answer 6

substitutes = high rates of substitutes mean price has a high impact on demand as customers will go buy these substitutes instead

Necessity = if unessential, price will have a high impact on demand and essential price will have a lower impact on demand

Question 7

What does advertising elasticity of demand measure (AED)

Answer 7

AED measures how demand responds to changes in advertising spend

Question 8

What is the formula for advertising elasticity of demand (AED)

Answer 8

% change in quantity demanded
————————————————
% change in advertising spend

Question 9

What does positive AED mean

Answer 9

Advertising raises sales

Question 10

What does high AED mean

Answer 10

High AED = Advertising is effective in terms of how much it increases demand

Question 11

What does cross elasticity of demand measure

Answer 11

XED = how demand for one product responds to the price change of another