Demand and Elasticities

Question 1

why does the demand curve slope down

Answer 1

because of diminishing marginal utility
each extra unit a consumer buys decreases in utility, so they are willing to pay lower prices for each additional good that they buy

Question 2

non-price determinants of demand which cause shifts

Answer 2

change in demographic
change in income
change in substitute goods prices
natural disasters/natural impacts
change is preferences due to advertising

Question 3

what is a normal good

Answer 3

a good which will be more demanded if income increases

Question 4

what is an inferior good

Answer 4

less demand when income increases

Question 5

what is a substitute good and what are the relationships

Answer 5

an alternative to another good, if the price of one goes up the demand for it will fall and the demand for substitute will increase

Question 6

what is a complementary good and relationship

Answer 6

goods used together, joint demand

Question 7

what is derived demand

Answer 7

demand in a good used to make another good eg demand for wood increases when demand for fencing

Question 8

what is composite demand

Answer 8

demand for a good which has more than one use eg oil makes plastic and petrol

Question 9

PED formula

Answer 9

percentage change in QD/percentage change in P

Question 10

YED formula

Answer 10

percentage change in QD/percentage change in real income

Question 11

XED formula

Answer 11

percentage change in QD of A/percentage change in price of good B

Question 12

elasticity of demand definition

Answer 12

the responsiveness of demand to a change in price

Question 13

YED definition

Answer 13

the responsiveness of demand to a change in income

Question 14

XED definition

Answer 14

the responsiveness in demand of a good to a change in price of another good

Question 15

types of PED

Answer 15

elastic, inelastic, unit elastic

Question 16

perfectly elastic value

Answer 16

+/- infinity

Question 17

perfectly inelastic value

Answer 17

0

Question 18

elastic demand value and meaning

Answer 18

PED>1 meaning change in price will cause a larger change in demand

Question 19

inelastic demand value and meaning

Answer 19

PED between 0 and 1 change in price causes smaller change in demand

Question 20

unitary elasticity value

Answer 20

1

Question 21

income elastic value

Answer 21

YED>1 (luxury good)

Question 22

income inelastic value

Answer 22

YED<1

Question 23

perfectly inelastic YED

Answer 23

YED=0

Question 24

inferior good YED

Answer 24

YED<0 (negative)

Question 25

XED for substitutes

Answer 25

XED>0 (positive)

Question 26

XED for complements

Answer 26

XED>0 (negative)

Question 27

factors affecting elasticities of demand

Answer 27

S- substitutes (more substitutes = more elastic)
P- Percentage of income
L- luxury/necessity
A- addictive/habit forming
T- time period (long term becomes fore elastic as it becomes easier to change to alternatives, and habits can change)

Question 28

uses of elasticities for firms and governments

Answer 28

sales levels can be predicted
safer because can supply range of YEDs so safe in a recession (risk spreading)
knowing what to do when complementary or substitute goods change price