How much one variable changes in response to a change in another related variable
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What is price elasticity of demand?
It measures the responsiveness of quantity demanded to a change in price
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How is marketing significant to the PED of firms?
A business needs to know what may happen if it changes the price of its products and they can find this out through marketing as price changes may needed if costs change or competitors change their prices
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How is branding significant to the PED of firms?
Businesses try to make the demand for their products less responsive to price by advertising and branding. They try to persuade their customers there is no acceptable substitute and if they succeed they can increase the price without losing sales
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How is total revenue significant to the PED of firms?
Changing a price can dramatically affect total revenue, depending upon whether the demand is price elastic or inelastic
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What can PED help to predict?
What may happen to total revenue at different price levels so this can help with pricing decisions
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Why is PED more important to producers in mass markets?
Goods and services are standardised and have many substitutes so price changes can have a much larger proportional effect on demand
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How is price elasticity of demand calculated?
% change in quantity demanded / % change in price
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What does price elastic mean?
A price change causes a proportionally bigger change in quantity demanded; % change in Q is greater than % change in P
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In the calculation for PED if a product is price elastic what will its numerical value be?
Beyond -1
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What does unit price elasticity mean?
A price change causes the same proportional change in quantity demanded; % change in Q is same as the % change in P
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In the calculation for PED if a product is unit price elastic what will its numerical value be?
-1
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What does price inelastic mean?
A price change causes a proportionally smaller change in quantity demanded; % change in Q is smaller than the % change in P
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In the calculation for PED if a product is price inelastic what will its numerical value be?
Between 0 and -1
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How does the number and closeness of substitutes influence PED?
The more substitutes a product has, the more price elastic it will be
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Why does a product being a luxury or a necessity influence PED?
Luxury items tend to be price elastic and necessities are price inelastic
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How does the proportion of income spent on a good influence PED?
If a very cheap product goes up by 10%, people will hardly notice and continue to buy it but if a very expensive product goes up by 10% sales will drop dramatically
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How does time scale influence PED?
In the short term, many products will be more price inelastic than in the long term
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If a product is price elastic what will increasing and reducing price do to total revenue?
Increasing price would reduce sales revenue; reducing price will increase TR
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If a product is price inelastic what will increasing and reducing price do to total revenue?
Increasing price would increase TR; reducing price would decrease TR
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Why does the government put more indirect tax on inelastic goods?
To generate more revenue
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In what type of market will highly price elastic goods be in?
A highly competitive market as there are plenty of substitutes so businesses must cut costs to maintain a competitive advantage
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How will businesses add value to a product to make it price inelastic?
They will select a market position to differentiate their product so demand is as price inelastic as possible
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Other cards in this set
Card 2
Front
What is price elasticity of demand?
Back
It measures the responsiveness of quantity demanded to a change in price
Card 3
Front
How is marketing significant to the PED of firms?
Back
Card 4
Front
How is branding significant to the PED of firms?
Back
Card 5
Front
How is total revenue significant to the PED of firms?
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