1.4 Elasticity

Question 1

What is elasticity

Answer 1

A measure independent of units. It is the % change in a variable in response to a % change in another

Question 2

What is PED

Answer 2

Price elasticity of demand - % change in quantity demanded over % change in price

This can be calculated by:

1. Δq/q / Δp/p
2. = Δq/Δp * p/q
3. = (pd q wrt p) * p/q

e.g.

q = a - bq

ed = -b * p/q

Question 3

What do the different values of PED indicate

Answer 3

PED = 0 : perfectly inelastic - no matter how much prices change demand will not change

between 0 and -1: inelastic - change in price > change in demand

PED = -1: unitary elastic - change in price = change in demand

PED < -1: elastic - demand changes more than price

PED = infinity: perfectly elastic - if price changes slightly demand will fall to 0

Question 4

What factors affect PED?

Answer 4

Substitutes - more subs, more elastic

Proportion of income - more spenny, more elastic

Luxury/ necessity - necessities are inelastic

Addicitve - inelastic

Time period - long running more elastic e.g. subscriptions

Question 5

What are some stats for elasticities?

Answer 5

Beer in the UK is -0.57

iPads is -2

Water in Cyprus is -0.05

Question 6

What is PED used for? How does it affect revenue?

Answer 6

Predicts how spenidng changes with price

Expenditure: TR = p x q(p)

When p rises, q(p) goes down so the effect is unclear. If we know elasticities states and firms could use this for useful stuff like tax receipts

The change in revenue is affected by PeD - calculus is on page 12

Basically the partial derivative of TR w.r.t price = (1+PED) x q(p)

As such total revenue increases if demand is inelastic and decreases if elastic at the initial q(p)

Question 7

What is YED

Answer 7

Income elasticity of demand - how change in income affects demand

dq/dy * Y/q

If YED > 0 it is a normal good (considered luxury if over 1)

If YED < 0 it is an inferior good

Question 8

What is XED

Answer 8

Cross elasticity of demand - how a change in price of a good affects the demand of another good

XEDab = dqA/dpB * Pb/Qa

XED > 0 : substitutes
XED < 0 : complements

XED = 0 : unrelated

Question 9

What is PES?

Answer 9

Price elasticity of supply

PES = dq/dp * p/q

Question 10

What is PES affected by?

Answer 10

TRIBES

Time
Resource availability
Invenotry