Page Number - 46-47

Chapter - 11

• The law of demand states that as the price of a product increases, the quantity demanded will tend to fall.

• The responsiveness of change in the quantity demanded may vary depending on the customer’s degree of ability and willingness to pay

• A rise in the price of a product with plenty of substitutes (such as bananas, greetings cards or chocolate bars) will have a larger impact on its level of demand than a price rise of a product that has fewer substitutes

• Price elasticity of demand (PED) measures the degree of responsiveness of the quantity demanded of a product following a change in its price.

• If a price change causes a relatively small change in the quantity demanded, then demand is said to be price inelastic, Buyers are not highly responsive to change in price

• Demand is said to be price elastic if there is a relatively large change in the quantity demanded of a product following a change in its price — that is, buyers are very responsive to changes in price.

• Calculation Of PED

  • Formula Of PED - Change in quantity percentage / Change in price percentage

  • Example - if a cinema increases its average ticket price from $10 to $11 and this leads to demand falling from 3500 to 3325 customers per week, then the PED for cinema tickets is calculated as: » Percentage change in quantity demanded = [(3325 − 3500)/3500] × 100 =

  • −5% » Percentage change in price

  • = [(11 – 10/10)] × 100

  • = +10% » PED

  • = −5/10

  • = −0.5