1.2 The market

Question 1

what factors can lead to a change in demand ?

Answer 1

Income
Change in prices of substitute goods
Rates of demand
change in tastes and preferences of the consumers .

Question 2

what factors can lead to a change in supply ?

Answer 2

natural conditions
technical progress
change in prices for production

Question 3

What’s the formula for calculating the price elasticity of demand and explain the numbers ?

Answer 3

change in demand divided by change in price

• if greater then 1 demand is elastic .
• less then 1 demand is inelastic.
• equal to 1 demand has unit elasticity .

Question 4

Describe factors that influence price elasticity of demand ?

Answer 4

• The number of close substitutes
• The cost of switching between products
• The degree of necessity or whether the good is a luxury
• The proportion of a consumer’s income allocated to spending on the good

Question 5

definition of inelastic demand

Answer 5

When there is a small change in demand when prices change a lot, the product is said to be inelastic. The most famous example of relatively inelastic demand is that for gasoline. As the price of gasoline increases, the quantity demanded doesn’t decrease all that much.

Question 6

definition of elastic demand

Answer 6

In economics, the demand elasticity (elasticity of demand) refers to how sensitive the demand for a good is to changes in other economic variables, such as prices and consumer income.

Question 7

suggest how a business will price its products based on price elasticity of demand .

Answer 7

Presence of substitutes or competitive products increases the elasticity of demand as consumers have alternative options if a company increases the price of its product. Inelastic Demand – A product or service is said to have inelastic demand if a change is price does not significantly impact the change in demand.

Question 8

calculate the impact of price elasticity of demand will have on total revenue .

Answer 8

if an increase in price causes a decrease in revenue then the product is elastic . if an increase in price causes an increase in revenue than its inelastic .

Question 9

how do you calculate income elasticity of demand .

Answer 9

quantity demanded divided by change in income

Question 10

explain the numerical income elasticity of demand values

Answer 10

Normal necessities have an income elasticity of demand of between 0 and +1

.Luxury goods and services have an income elasticity of demand > +1 i.e. demand rises more than proportionate to a change in income

there are some products (economists call them “inferior goods”) which have a negative income elasticity of demand, meaning that demand falls as income rises.

Question 11

describe factors that influence income elasticity of demand

Answer 11

whether goods are necessities inelastic or luxuries elastic

Question 12

what is the significance of income elasticity of demand to as business .

Answer 12

if business know there income elasticity of demand they can respond to predict d changes in incomes