unit 1.24 PED

Question 1

what does Price elasticity of demand do

Answer 1

-PED calculates how responsive the change in QD will be to a change in price

Question 2

How can PED be calculated

Answer 2

-PED= %change in quantity demanded/ %change in price
-PED value is always negative

Question 3

How to calculate a percentage change?

Answer 3

%change = new value- old value/ old value x 100

Question 4

What does a PED value of lower than -1 mean?

Answer 4

-demand is elastic (very responsive to change in price)
-a small % fall in price results in a larger % rise in demand

Question 5

What does a PED value between 0 and -1 mean?

Answer 5

Demand is inelastic ( less responsive when price changes)
-demand changes only a little when price changes
- a small increase in price results in a even smaller change in quantity demand)

Question 6

what does a PED of -1 mean?

Answer 6

• demand is unit elastic
  -the percentage change in quantity demanded is exactly the same as percentage change in price but in the opposite direction

Question 7

in inelastic demand or PED id between o to -1 what is the impact to a business?

Answer 7

-raising price- increases total revenue (because demand doesn’t fall much)
-lowering price-reduces total revenue (because demand doesn’t rise much)

Question 8

in elastic demand or when PED is less than -1

Answer 8

-raising price-will likely decrease total revenue (because customers stop buying)

-lowering price-will likely increase total revenue (because the increase in quantity sold outweighs the lower price per unit)

Question 9

in unit elastic demand or when PED is -1 how does that impact a business?

Answer 9

-total revenue stays the same when price changes
-a price rise doesn’t increase total revenue
-a price cut decrease total revenue
(this is because the change in price is directly counteracted by the change in quantity sold

Question 10

How does brand loyalty influence PED?

Answer 10

-shifts the demand curve to the right and make the demand more price inelastic

Question 11

How does availability of Substitutes?

Answer 11

-PED will be lower, more price inelastic for goods that have fewer substitutes as can not be replaced

Question 12

-how does the proportion of income taken up by the product effect PED?

Answer 12

-The smaller the proportion of income we spend on a product, the more price inelastic the demand will be

-For example, a small amount of income is spent on salt, so the demand for salt will be more price inelastic. However, buying a new car takes up a bigger proportion of consumer income, so the PED is higher

Question 14

How does a product being luxary or necessity affect PED?

Answer 14

-Necessities are required as part of consumers daily needs, and therefore the demand for them ks more price inelastic
-luxaries are not essential and therefore demand for them is more price elastic.

Question 15

How does time affect PED?

Answer 15

-The longer the time period, consumers have more time to search for substitutes, so price is more elastic
-the shorter the time period, consumers can not easily change their buying habits and find alternatives, so price is more inelastic

Question 16

What are the significance of PED to a business?

Answer 16

-if the business can determine PED for their products, they can adjust their pricing strategy to maximise their revenue

Question 17

What does this mean for business revenue?

Answer 17

-if demand for their product is relitavely price inelastic (PED<-1) raising the price will lead to an increase in revenue however lowering the price will lead to a fall in total reveunue
-if demand for their product is relitavely price elastic (PED <-1) raising price will lead to a fall in total revenue. However lowering the price will lead to a rise in total revenue

Question 18

1a) What type of strategies does a business use for price inelastic demand
1b) and for price elastic demand

Answer 18

1a) Price skimming strategies
1b) Competitive pricing strategies

Question 19

What is the relatiionship between PED and total revenue

Answer 19

-when PED is greater than 1 an increase in the selling price reduces the total amount of revenue generated from sales, However a reduction in the selling price increases the total amount of revenue generated from sales
-when PED is between 0 and 1: An increase in the selling price increases the total revenue from saes, However a dev=crease in the selling price reduces the total amount of revenue generated from sales.