Topic: Price Elasticity of Demand

Q1

Define Price Elasticity of Demand (including the word: ‘responsiveness’)

Price elasticity of demand measures the responsiveness of demand after a change in a product's own
price.

Price Elasticity of Demand (PED) is calculated by:

The price elasticity of demand (PED) is calculated by dividing the percentage change in quantity
demanded by the percentage change in price.

Q2

The price of a bicycle increases from £50 to £70 and as a result, demand falls from 200 units to 180.
Calculate PED (show your working):

The price increases from 50 to 70 Therefore % change = 20/50 = 0.4 (40%)

0.4= 40% (0.4*100)

Quantity fell by 20/200= - 0.1 (10%)

Therefore PED = 20/-40

Therefore PED = -0.5

Is the demand for this type of bicycle price elastic or inelastic?

In this case demand for this type of bicycle price is price elastic.

Explain why:

Elastic demand occurs when % change in quantity is greater than % change in price; when PED >1

Plot the demand curve based on the information above

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Topic: Price Elasticity of Demand

Q3

In a bid to increase sales and hence revenue, Budget Holidays are contemplating whether to
increase or decrease price from their starting point of £500 per holiday. They only know the
following:

Price (£) Quantity Demanded (holidays) Total Revenue (£)

400 1400 400*1400= 560.000
500 1000 500* 1000= 500.000
600 600 600*600= 360.000

Work through the questions below:

Fill in the total revenue column.

Calculate the PED if the price rises to £600:

Calculate the PED if the price falls to £400:

Plot the demand curve

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Topic: Price Elasticity of Demand

Explain (using the data and PED) whether the firm should increase, decrease or maintain price (4)

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Topic: Price Elasticity of Demand

Q4

Cross out the wrong option:

- PED for a normal good should be negative/positive.

- this is because there is an inverse/positive relationship between price and quantity
demanded.
- A steep/shallow demand curve suggests that the good is inelastic ie it is relatively
unresponsive/responsive to a change in price.
- For a good which is elastic in nature, the percentage change in quantity demanded is
less/more than the percentage change in price.

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