Study Notes
Price elasticity of demand (PED) measures how much the quantity demanded of a product changes in response to a change in its price.
- Price Elasticity of Demand (PED) — the degree of responsiveness of quantity demanded to a change in price. Example: If the price of Coca-Cola increases, and the quantity demanded decreases significantly, it has a high PED.
- Elastic Demand — when a small change in price leads to a large change in quantity demanded. Example: Luxury goods like cars often have elastic demand.
- Inelastic Demand — when a change in price leads to a small change in quantity demanded. Example: Necessities like rice and water typically have inelastic demand.
- Unitary Elasticity — when a change in price leads to an equal change in quantity demanded. Example: If a 10% price increase leads to a 10% decrease in quantity demanded, it is unitary elastic.
- Perfectly Elastic Demand — quantity demanded changes infinitely with a small price change. Example: A perfectly competitive market product.
- Perfectly Inelastic Demand — quantity demanded does not change with price changes. Example: Life-saving drugs.
Exam Tips
Key Definitions to Remember
- Price Elasticity of Demand (PED)
- Elastic Demand
- Inelastic Demand
- Unitary Elasticity
- Perfectly Elastic Demand
- Perfectly Inelastic Demand
Common Confusions
- Confusing elastic demand with inelastic demand
- Misunderstanding the relationship between PED and revenue
Typical Exam Questions
- What is price elasticity of demand? It measures how much the quantity demanded changes with a change in price.
- How does elastic demand affect revenue? Lowering prices can increase revenue as demand increases significantly.
- How does inelastic demand affect revenue? Raising prices can increase revenue as demand does not decrease much.
What Examiners Usually Test
- Understanding of how PED affects business decisions
- Ability to calculate PED and interpret its value
- Knowledge of factors affecting PED