2281 · 2.7
Price elasticity of demand flashcards
Revision flashcards for Cambridge 2281 Price elasticity of demand (syllabus 2.7). Flip, recall, then mark a real past-paper question.
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What is the formula for Price Elasticity of Demand (PED)?
Percentage Change in Quantity Demanded / Percentage Change in Price.
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If a product has a PED of -0.4, what does this signify for pricing strategy?
Demand is price inelastic. To increase total revenue, the firm should increase the price, as the fall in quantity demanded will be proportionally smaller than the rise in price.
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Name three key determinants of PED.
1. Availability of close substitutes. 2. Proportion of income spent on the good. 3. Whether the good is a luxury or a necessity. (Also: addictiveness, time period).
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What does a perfectly elastic demand curve look like and what is its PED value?
It is a horizontal line, indicating that any price increase will cause quantity demanded to fall to zero. Its PED value is infinity (∞).
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Explain why PED changes along a straight-line demand curve.
PED is calculated using percentage changes. At high prices (top of the curve), a price change is a small percentage, but the quantity change is a large percentage of a small base, making demand elastic. At low prices (bottom of the curve), the opposite is true, making demand inelastic.
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What does a PED of 1 (or -1) signify, and what is the effect of a price change on total revenue?
This is called unitary elastic demand. It means the percentage change in quantity demanded is exactly equal to the percentage change in price. A price change will have no effect on total revenue.
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What does a positive value for Cross Elasticity of Demand (XED) indicate about the relationship between two goods?
A positive XED indicates that the two goods are substitutes. An increase in the price of one good leads to an increase in the quantity demanded of the other good (e.g., Coca-Cola and Pepsi).
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What is the difference between a normal good and an inferior good in terms of Income Elasticity of Demand (YED)?
A normal good has a positive YED (demand increases as income rises). An inferior good has a negative YED (demand falls as income rises).