📚 Topic Summary
Price Elasticity of Demand (PED) measures how much the quantity demanded of a good changes in response to a change in its price. It helps businesses understand how price changes will affect their revenue. If demand is elastic (PED > 1), a small price change will lead to a relatively large change in quantity demanded. If demand is inelastic (PED < 1), a price change will have a relatively small impact on quantity demanded. Understanding PED is crucial for making informed decisions about pricing strategies.
🧠 Part A: Vocabulary
Match the terms with their definitions:
| Term |
Definition |
| 1. Price Elasticity of Demand |
A. Demand where the percentage change in quantity demanded is greater than the percentage change in price. |
| 2. Elastic Demand |
B. A measure of the responsiveness of quantity demanded to a change in price. |
| 3. Inelastic Demand |
C. Demand where the percentage change in quantity demanded is less than the percentage change in price. |
| 4. Unit Elastic Demand |
D. Demand where the percentage change in quantity demanded is equal to the percentage change in price. |
| 5. Perfectly Inelastic Demand |
E. Quantity demanded does not change when price changes. |
(Match the terms above. Answers: 1-B, 2-A, 3-C, 4-D, 5-E)
✍️ Part B: Fill in the Blanks
Complete the following paragraph using the words provided: revenue, elastic, inelastic, price, quantity.
If demand is __________, a decrease in __________ will lead to an increase in __________, resulting in higher __________. Conversely, if demand is __________, a decrease in price will lead to a smaller increase in quantity, possibly resulting in lower revenue.
(Answers: elastic, price, quantity, revenue, inelastic)
🤔 Part C: Critical Thinking
Explain how understanding the price elasticity of demand can help a business make better pricing decisions. Provide a specific example.
(Answer: Understanding PED allows businesses to predict how changes in price will affect their total revenue. For example, if a business knows that the demand for their product is elastic, they can lower the price to increase sales and overall revenue. Conversely, if demand is inelastic, they can raise prices without significantly affecting sales volume, thus increasing revenue. A movie theater, for example, might find that demand for movie tickets is relatively inelastic, allowing them to increase ticket prices without losing many customers.)