Chapter 5

Question 1

What is price elasticity

Answer 1

How does demand for a product change when its price changes

Question 2

What is elastic demand?

Answer 2

When a small change in price causes a large change in demand.
PED is smaller than -1.

Question 3

What is Inelastic demand

Answer 3

When a large change in price only causes a small change in demand.
PED is between 0 and -1.

Question 4

How to calculate PED (Price Elasticity of Demand)

Answer 4

% change in quantity demanded / % change in price
(The answer is usual a negative number)

Question 5

What is the non-average arc method (which influences PED)

Answer 5

Step 1- work out percentage change in demand
Step 2 - work out percentage change in price
Step 3 - Calculate PED

Question 6

How to calculate the Average Arc Method

Answer 6

Step 1: work out the average price.
Step 2: then work out the percentage change by dividing through the average price.
Step 3 : then calculate the PED

Question 7

What is unit elasticity?

Answer 7

When the PED is -1. This means that the change in price and demand are the same.

Question 8

Formula for the demand curve

Answer 8

Qd = a - bP

Qd: quantity demanded, where the curve starts on the y axis.

b: the gradient

P: Price

Question 9

What does it mean when the price is Perfecly Elastic?

Answer 9

Any increase in price leads to a total loss of demand.
This happens when a product has a perfect substitute.

Question 10

Elastic price =

Answer 10

Any change in price leads to a higher change in demand

Question 11

Unitary elastic =

Answer 11

Any change in price leads exactly proportional to a change in demand

Question 12

Inelastic demand =

Answer 12

Any change in price leads to a smaller change in demand.

Question 13

Perfectly Inelastic good =

Answer 13

Demand is completely unresponsive to changes in price (water may be an example

Question 14

When could PED be positive?

Answer 14

If it’s a Giffen or Veblen good, where demand increases as the price increases

Question 15

3 main uses of price elasticity of demand

Answer 15

1. Revenue implications
2. Production / purchases
3. Taxation

Question 16

Factors influencing price elasticity of demand

Answer 16

• brand loyalty
• % of income spent
• availability of substitutes
• competitor pricing
• habit to use the product
• necessity or Luxor
• time since the last price change
• definition of the market

Question 17

What is supply elasticity?

Answer 17

How does supply change for a product when its price changes

Question 18

PES (price elasticity of supply) =

Answer 18

% change in quantity supplied / % change in price

Question 19

Supply elasticity levels:

Answer 19

0 to 1, means Inelastic
1 means unit elasticity
Above 1, means elastic

Question 20

Supply curve formula:

Answer 20

Qs = c + dp

Qs = Quantity supplied
C = the point where the curve starts on the X-axis
d = the gradient
P = price

Question 21

Perfectly elastic supply =

Answer 21

When any change in price from p1 will cause supply to fall to 0.

Question 22

Perfectly Inelastic supply =

Answer 22

Supply is completely unresponsive to changes in price

Question 23

Factors that influence price elasticity of supply

Answer 23

• Number of competitors
• Developments in technology
• definition of the market
• availability of the factors of production
• production capacity
• long run v short run
  -stock