Exam code: 0455 & 0987
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What do economists mean when they say they are interested in “how much” quantity demanded will fall after a price rise?
Economists want to know the degree of responsiveness of quantity demanded to a price change, not just that it will fall.
Define price elasticity of demand (PED).
Price elasticity of demand (PED) measures how responsive the quantity demanded is to a change in price.
For different types of products, the to price changes is different.
For different types of products, the responsiveness to price changes is different.
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What do economists mean when they say they are interested in “how much” quantity demanded will fall after a price rise?
Economists want to know the degree of responsiveness of quantity demanded to a price change, not just that it will fall.
Define price elasticity of demand (PED).
Price elasticity of demand (PED) measures how responsive the quantity demanded is to a change in price.
For different types of products, the to price changes is different.
For different types of products, the responsiveness to price changes is different.
What is the formula for calculating price elasticity of demand (PED)?
PED is calculated as percentage change in quantity demanded divided by percentage change in price.
To calculate a percentage change, use the formula: ( value minus value) divided by value, times 100.
To calculate a percentage change, use the formula: (new value minus old value) divided by old value, times 100.
True or False?
PED values are always negative, but economists often ignore the sign and use the absolute value.
True.
PED is negative due to the inverse relationship between price and quantity demanded, but the sign is often ignored for convenience.
Define price elastic demand.
Price elastic demand means that the percentage change in quantity demanded is more than proportional to the percentage change in price.
If the PED value is or less, demand is inelastic.
If the PED value is 1 or less, demand is inelastic.
What does it mean if a product has a PED of infinity?
A product with a PED of infinity has perfectly elastic demand, meaning any price increase causes quantity demanded to fall to zero.
Define unitary elasticity.
Unitary elasticity is when the percentage change in quantity demanded is exactly equal to the percentage change in price.
What does the SPLAT acronym stand for in relation to PED?
SPLAT stands for Substitutes, Proportion of income, Luxury or necessity, Addictiveness, and Time period—these are the main determinants of PED.
A product that is a will generally have more elastic demand than a necessity.
A product that is a luxury will generally have more elastic demand than a necessity.
Define total revenue.
Total revenue is the amount of money a firm receives from selling its goods or services, calculated as price × quantity.
What does the total revenue rule state about changing prices for elastic and inelastic goods?
The total revenue rule states that to maximise revenue, firms should increase prices for inelastic goods and decrease prices for elastic goods.
True or False?
If demand is price elastic, lowering the price increases total revenue.
True.
For price elastic goods, a decrease in price leads to a more than proportional increase in quantity demanded, raising total revenue.
When demand is , raising the price will increase total revenue because the percentage fall in quantity demanded is than the percentage increase in price.
When demand is inelastic, raising the price will increase total revenue because the percentage fall in quantity demanded is smaller than the percentage increase in price.
A firm increases its price from £10 to £15 and sales fall from 100 to 40 units. Did total revenue increase or decrease, and what does this indicate about elasticity?
Total revenue decreased from £1,000 to £600, indicating that demand is price elastic. The firm should have lowered its price to maximise revenue.
Define price elasticity of demand (PED).
Price elasticity of demand (PED) measures how much the quantity demanded of a product changes in response to a change in its price.
How does understanding PED help consumers make better purchasing decisions?
Understanding PED helps consumers identify which products will affect their budget most when prices change, allowing them to adjust spending on elastic goods and prioritise inelastic essentials.
If demand is , a price increase leads to higher total revenue for firms.
If demand is price inelastic, a price increase leads to higher total revenue for firms.
Workers in industries with demand tend to have more stable employment and revenue.
Workers in industries with price inelastic demand tend to have more stable employment and revenue.
How might trade unions use PED data when negotiating wages?
Trade unions may use PED data to argue that wage increases in sectors with price inelastic demand will not reduce demand for labour, supporting their case for higher wages.
True or False?
Workers in price elastic industries generally experience more stable employment than those in price inelastic industries.
False.
Workers in price inelastic industries experience more stable employment, as demand does not drop sharply with price changes.
Why do governments often tax goods with price inelastic demand?
Governments tax goods with price inelastic demand (like tobacco or petrol) because consumers are less responsive to price increases, so tax revenue rises with little reduction in sales.