What does it mean to say demand for a product is price elastic?

It means the quantity demanded changes proportionately more than the price, so a small price change causes a large change in sales.

What does it mean to say demand for a product is price inelastic?

It means the quantity demanded changes proportionately less than the price, so sales are relatively unaffected by a price change.

Why is price elasticity of demand normally a negative figure?

Price and quantity demanded move in opposite directions, so one of the two percentage changes is negative and the result therefore carries a minus sign.

Demand for a product has a price elasticity of −0.4. Explain what this tells a business.

Demand is price inelastic, because a 10% price rise would reduce quantity demanded by only 4%, so raising the price would increase the business's total revenue.

WJEC A-Level Business 601-5238-2

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Markets and Market Research

Price and income elasticity of demand

3 things to know
AS Unit 1

Overview

Price elasticity of demand and income elasticity of demand.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Explain why the availability of substitutes is the most important influence on price elasticity.

Key term

What is meant by price elasticity of demand?

Numbers

State the formula for price elasticity of demand.

Questions from this subtopic

Each one with the model answer underneath.

1
What is meant by price elasticity of demand?
Model answer
Price elasticity of demand measures how responsive the quantity demanded of a product is to a change in its price.
2
State the formula for price elasticity of demand.
Model answer
Price elasticity of demand = percentage change in quantity demanded ÷ percentage change in price.
3
What does it mean to say demand for a product is price elastic?
Model answer
It means the quantity demanded changes proportionately more than the price, so a small price change causes a large change in sales.
4
What does it mean to say demand for a product is price inelastic?
Model answer
It means the quantity demanded changes proportionately less than the price, so sales are relatively unaffected by a price change.
5
Why is price elasticity of demand normally a negative figure?
Model answer
Price and quantity demanded move in opposite directions, so one of the two percentage changes is negative and the result therefore carries a minus sign.
6
Demand for a product has a price elasticity of −0.4. Explain what this tells a business.
Model answer
Demand is price inelastic, because a 10% price rise would reduce quantity demanded by only 4%, so raising the price would increase the business's total revenue.

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