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# price elasticity of demand

question
what is price elasticity of demand
This shows how much a change in price will affect demand
question
PED =
% change in quantity demanded / %change in price
question
if PED is greater than one
the good is price elastic. Demand is responsive to a change in price. e.g. a 15% fall in price leads to a 30% increase in quantity demanded, the price elasticity = 2.0
question
if the PED is less than one
the good is price inelastic. Demand is not very responsive to changes in price. e.g. a 20% increase in price leads to a 5% fall in quantity demanded, the price elasticity = 0.25
question
PED = 0
demand is perfectly inelastic - demand does not change when the price changes - the demand curve is vertical
question
PED is between 0 and 1
(% change in demand is smaller than the percentage change in price), then demand is inelastic
question
PED = 1
(% change in demand is the same as the % change in price), then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level
question
PED > 1
demand responds more than proportionately to a change in price i.e. demand is elastic. For example, if a 10% increase in price leads to a 30% drop in demand. The price elasticity of demand for this price change is -3
question
Number of close substitutes available for consumers
The closer substitutes there are, the more price elastic the demand e.g. many brands of breakfast cereal
question
Price of the product in relation to total income
When the % of budget is high, demand is usually more price sensitive i.e. price elastic
question
Cost of substituting between different products
When substitution/switching costs are high, demand will tend to be price inelastic
question
Brand loyalty and habitual consumption
- High levels of brand loyalty make demand less price elastic
- Persuasive advertising can make demand price inelastic
question
Degree of necessity / luxury
Standard assumption is that necessities have a lower price elasticity of demand whereas luxuries are an optional spend
question
6 factors that affect ped
Time
Availablity of substitutes
Necessary or luxury
Brand loyalty
Proportion of income
1 of 14
question
what is price elasticity of demand
This shows how much a change in price will affect demand
question
PED =
% change in quantity demanded / %change in price
question
if PED is greater than one
the good is price elastic. Demand is responsive to a change in price. e.g. a 15% fall in price leads to a 30% increase in quantity demanded, the price elasticity = 2.0
question
if the PED is less than one
the good is price inelastic. Demand is not very responsive to changes in price. e.g. a 20% increase in price leads to a 5% fall in quantity demanded, the price elasticity = 0.25
question
PED = 0
demand is perfectly inelastic - demand does not change when the price changes - the demand curve is vertical
question
PED is between 0 and 1
(% change in demand is smaller than the percentage change in price), then demand is inelastic
question
PED = 1
(% change in demand is the same as the % change in price), then demand is unit elastic. A 15% rise in price would lead to a 15% contraction in demand leaving total spending the same at each price level
question
PED > 1
demand responds more than proportionately to a change in price i.e. demand is elastic. For example, if a 10% increase in price leads to a 30% drop in demand. The price elasticity of demand for this price change is -3
question
Number of close substitutes available for consumers
The closer substitutes there are, the more price elastic the demand e.g. many brands of breakfast cereal
question
Price of the product in relation to total income
When the % of budget is high, demand is usually more price sensitive i.e. price elastic
question
Cost of substituting between different products
When substitution/switching costs are high, demand will tend to be price inelastic
question
Brand loyalty and habitual consumption
- High levels of brand loyalty make demand less price elastic
- Persuasive advertising can make demand price inelastic
question
Degree of necessity / luxury
Standard assumption is that necessities have a lower price elasticity of demand whereas luxuries are an optional spend
question
6 factors that affect ped
Time
Availablity of substitutes
Necessary or luxury
Brand loyalty
Proportion of income

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