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Questions and Answers
What is the definition of elasticity of demand?
What is the definition of elasticity of demand?
Elasticity of demand is a measure of the responsiveness of the quantity demanded from a good to a change in one of its determinants.
What does PED stand for?
What does PED stand for?
Elasticity is the same as the slope of the demand curve.
Elasticity is the same as the slope of the demand curve.
False (B)
What is the formula for calculating the PED?
What is the formula for calculating the PED?
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What are the five categories of PED?
What are the five categories of PED?
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If the PED is greater than 1, the demand is considered inelastic.
If the PED is greater than 1, the demand is considered inelastic.
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The formula for PED always yields a positive value.
The formula for PED always yields a positive value.
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What characterizes a Perfectly Inelastic demand curve?
What characterizes a Perfectly Inelastic demand curve?
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Flashcards
Price Elasticity of Demand (PED)
Price Elasticity of Demand (PED)
A measure of how responsive quantity demanded is to a change in price, keeping other factors constant.
PED Calculation
PED Calculation
Calculated as the percentage change in quantity demanded divided by the percentage change in price.
Elastic Demand
Elastic Demand
Demand where the percentage change in quantity demanded is greater than the percentage change in price.
Inelastic Demand
Inelastic Demand
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Unit Elastic Demand
Unit Elastic Demand
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Perfectly Inelastic Demand
Perfectly Inelastic Demand
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Perfectly Elastic Demand
Perfectly Elastic Demand
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Calculating PED
Calculating PED
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Responsiveness
Responsiveness
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Units-free measure
Units-free measure
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Determinants of Demand (excluding price)
Determinants of Demand (excluding price)
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Study Notes
Elasticity of Demand
- Elasticity of demand measures how responsive quantity demanded is to changes in one of its determinants.
Chapter Outline
- Price Elasticity of Demand
- Income Elasticity of Demand
- Cross Elasticity of Demand
- Elasticity of Supply
Price Elasticity of Demand (PED)
- PED is the responsiveness of quantity demanded to price changes, holding other factors constant.
- It's different from the slope of the demand curve; slope depends on units, PED doesn't.
- PED is a unit-free measure.
Calculating PED
- PED = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
- If good X: PEDx = %ΔQDx / %ΔPx
Calculating PED (More Detail)
- To calculate correctly, percentages of average values are used.
- PED = [((Q2 - Q1) / (Q1 + Q2)) / 2] × 100 ÷[((P2 - P1) / (P1 + P2)) /2] × 100
Example Calculation
- Given a pizza demand scenario.
- Original point: Price = $20, Quantity = 10 Pizzas
- New point: Price = $19.50, Quantity = 11 Pizzas
- Calculate PED.
PED Solution
- PED will be a negative value because price and quantity move in opposite directions
- The example's solution shows PED as -4, indicating an elastic demand
PED Considerations
- Elasticity is a ratio of percentages. Units of measurement don't change the elasticity value
- The formula generally produces a negative value, but the magnitude (absolute value) is relevant for response to price change
Types of PED
- Elastic: Percentage change in quantity demanded is greater than the percentage change in price (PED > 1).
- Inelastic: Percentage change in quantity demanded is less than the percentage change in price (PED < 1).
- Unit Elastic: Percentage change in quantity demanded equals the percentage change in price (PED = 1).
- Perfectly Inelastic: Quantity demanded doesn't change when price changes (PED = 0).
- Perfectly Elastic: Any price change results in an infinitely large change in quantity demanded (PED = ∞).
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