Elasticity

Question 1

Explain why  PED changes along a straight line downward sloping
demand curve (HL only)

Answer 1

PED reduce as price falls
at high prices — there is quantity is low - demand is elastic
at low prices — there is quantity is high - demand is inelastic
At the mid point there is unit elastic demand

Question 2

Relation between Demand and YED

Answer 2

Positive YED > 0
(Positive relationship between demand and incomes)
e.g normal goods

Negative YED < 0
(Positive relationship between demand and incomes)
e.g inferiori goods

Question 3

What is YED

Answer 3

measure of responsive of demand to a change in incomes

Question 4

Aplication of YED

Answer 4

as economic growth occurs - there is - increase in income
Increase income = demand for goods & services increase (grows)

Average growth rate in income in the economy is 3% per year
if YED is elastic - demand for goods and services grows at rate higher than 3%
If YED inelastic - demand for goods and services grows art a rate lower than 3%

Important to know YED so
1. firms can plan for future
2. in explaining changes in the sectoral structure of
the economy.

Question 5

YED and Sectoral structure

Answer 5

YED and sectoral structure of the economy
All economies have 3 parts
Primary sector (argiculture, forestry, fishing) - Primary products (produce food)

Manufacturing sector

Service sector - travel, entertainment, education etc

Economic growth causes changes to the 3 sectors over time which can be explained through YED

Primary sector - (income inelastic) - as income rises, demand for agriculture produce increase slowly - slower than the growth income.

Manufactured products (income elastic) - as income rises, demand for these products grows even faster (faster than income growth). e.g products are: televisions, cars etc.

Services - often have an even greater YED than manufactured products, thus percentage in demand would be even larger

Question 6

Why many primary commodities have a lower PES compared with PES of manufactured products

Answer 6

Main reason - time needed for quantity supplied to respond to a change in price Its difficult for resources to be shifted in and out of agriculture - a long period of time is need. Technological change needed to combat some of the issue that make it difficult for farmers to alter there quantity supplied would also take a long period of time

For other primary products (not agriculture)
Time is needed to make investments & start production - due to cost first don’t respond quickly to change in price - they wait for the primary commodity to have excess demand before increasing production.