Price elasticity of demand

What does Price Elasticity of Demand (PED) show?

• How much demand changes when price changes.

• How much supply changes when price changes.

• How much demand changes when income changes.

• How much supply changes when income changes.

Answer explanation

Price Elasticity of Demand (PED) measures how much the quantity demanded of a good changes in response to a change in its price. Therefore, the correct choice is 'How much demand changes when price changes.'

If demand changes a lot with a small price change, what is this called?

• Elastic demand

• Inelastic demand

• Unitary demand

• Perfectly inelastic demand

Answer explanation

When demand changes significantly with a small price change, it is referred to as elastic demand. This indicates that consumers are sensitive to price changes, leading to a larger change in quantity demanded.

If the Price Elasticity of Demand (PED) is less than 1, what does this indicate?

• Inelastic demand

• Elastic demand

• Unitary demand

• Perfectly elastic demand

Answer explanation

If the Price Elasticity of Demand (PED) is less than 1, it indicates inelastic demand, meaning that consumers are less responsive to price changes. Thus, the correct choice is inelastic demand.

Which formula is used to calculate PED using the midpoint method?

• (Q2-Q1)/(Q1+Q2)/2 divided by (P2-P1)/(P1+P2)/2

• (Q2-Q1)/(P2-P1)

• (P2-P1)/(Q2-Q1)

• (Q1+Q2)/(P1+P2)

Answer explanation

The correct formula for calculating Price Elasticity of Demand (PED) using the midpoint method is (Q2-Q1)/(Q1+Q2)/2 divided by (P2-P1)/(P1+P2)/2, as it averages the changes in quantity and price.

A product’s price increases by 10%, and its quantity demanded decreases by 20%. Based on the PED formula, is the demand elastic or inelastic? (Show your reasoning.)

• Elastic, because PED > 1

• Inelastic, because PED < 1

• Unitary, because PED = 1

• Perfectly inelastic, because PED = 0

Answer explanation

To calculate the Price Elasticity of Demand (PED), use the formula: PED = % change in quantity demanded / % change in price. Here, PED = -20% / 10% = -2. Since the absolute value is greater than 1, demand is elastic.

What does PED stand for in economics?

• Price Elasticity of Demand

• Product Elasticity of Demand

• Price Efficiency of Demand

• Product Efficiency of Demand

Answer explanation

In economics, PED stands for Price Elasticity of Demand, which measures how the quantity demanded of a good responds to a change in its price. This concept is crucial for understanding consumer behavior and market dynamics.

Which of the following is likely to be a product with elastic demand?

• Movie tickets

• Petrol (Gasoline)

• Bread

• Salt

Answer explanation

Movie tickets have elastic demand because they are a luxury item with many substitutes. When prices rise, consumers can easily choose other entertainment options, unlike essential goods like petrol, bread, or salt.

If a product has inelastic demand, what happens to revenue when the price is increased?

• Revenue increases

• Revenue decreases

• Revenue stays the same

• Revenue becomes zero

Answer explanation

When demand is inelastic, consumers are less sensitive to price changes. Therefore, increasing the price leads to a proportionally smaller decrease in quantity demanded, resulting in higher total revenue. Thus, revenue increases.

Which factor would make the price elasticity of demand (PED) more elastic?

• More substitutes available

• Fewer substitutes available

• Product is a necessity

• Less time to adjust

Answer explanation

More substitutes available make demand more elastic because consumers can easily switch to alternatives if the price rises, leading to a larger change in quantity demanded. This increases the price elasticity of demand.

A company sells a luxury product. According to the factors affecting PED, how would you expect the demand for this product to behave if the price changes?

• Demand would be elastic

• Demand would be inelastic

• Demand would not change

• Demand would become negative

Answer explanation

Demand for luxury products is typically elastic because consumers can forgo these items if prices rise. Thus, a price increase would lead to a proportionally larger decrease in quantity demanded, making demand elastic.