PED Revision

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  • Created by: Simone
  • Created on: 05-01-14 10:42
Define PED
measures the responsiveness of quantity demanded to changes in the price of a product
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Is PED positive or negative?
Negative
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What values of PED are elastic?
greater than -1
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What does elastic PED mean?
changes in price will bring about bigger change in demand
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What is an elastic good?
Luxury good
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What values are inelastic?
between 0 and -1
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What does inelastic PED mean?
a change in price will bring about a smaller change in quantity demanded
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What is an inelastic good?
Necessity
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What value is unitary?
-1
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What does unitary mean?
a change in price will bring an exact and opposite change in demand
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What is the business relevance of PED?
Effects pricing decisions
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If a good is inelastic what should firms do?
increase price = increase in total revenue
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If a good is elastic what should firms do?
decrease price = increase in revenue
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What are the three determinants of elasticity?
1. Availability and closeness of substitutes 2. proportion of consumers total expenditure 3. time
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Explain the availability and closeness of substitutes
the more substitutes the more elastic (higher PED) - consumer can switch... no substitutes = inelastic
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Explain the proportion of consumers total expenditure
low proportion of expenditure = lower inelasticity (less likely to look around for substitutes)
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Explain time
the longer the period of time, the more elastic a good becomes - in the short term it is inelastic but becomes elastic when consumers find subs and alter spending habits
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Other cards in this set

Card 2

Front

Is PED positive or negative?

Back

Negative

Card 3

Front

What values of PED are elastic?

Back

Preview of the front of card 3

Card 4

Front

What does elastic PED mean?

Back

Preview of the front of card 4

Card 5

Front

What is an elastic good?

Back

Preview of the front of card 5
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