Supply & demand (2)

Question 1

Price Elasticity of Demand (PED)

Answer 1

The responsiveness of quantity demanded to a change in price.

Question 2

Elastic Demand

Answer 2

Where quantity demanded changes by a larger percentage than price, with a value greater than 1 (ignoring the negative sign).

Question 3

Inelastic Demand

Answer 3

Where quantity demanded changes by a smaller percentage than price, with a value less than 1 (ignoring the negative sign).

Question 4

Unit Elasticity of Demand

Answer 4

Where quantity demanded changes by the same percentage as price, with a value equal to 1 (ignoring the negative sign).

Question 5

Total Revenue (TR)

Answer 5

The total amount received by firms from the sale of a product, calculated as TR = P x Q.

Question 6

Arc Elasticity

Answer 6

The measurement of elasticity between two points on a curve.

Question 7

Point Elasticity

Answer 7

The measurement of elasticity at a point on a curve, using the formula dQ/dP × P/Q.

Question 8

Sign and Value of PED

Answer 8

PED values are typically negative. é > 1 indicates elastic demand, é < 1 indicates inelastic demand, and é = 1 indicates unit elasticity.

Question 9

Determinants of PED

Answer 9

1. Number and closeness of substitute goods. 2. Proportion of income spent on the good. 3. Time period after a price change.

Question 10

Implication of PED for Total Revenue

Answer 10

Elastic demand (E>1) means TR decreases as P rises and increases as P falls. Inelastic demand (E<1) means TR increases as P rises and decreases as P falls.

Question 11

Price Elasticity of Supply (PES)

Answer 11

The responsiveness of quantity supplied to a change in price.

Question 12

Income Elasticity of Demand (IED)

Answer 12

The responsiveness of quantity demanded to a change in consumer income.

Question 13

Cross-Price Elasticity of Demand (CPED)

Answer 13

The responsiveness of demand for one good to a change in the price of another good.

Question 14

Normal Goods

Answer 14

Goods whose demand increases as consumer incomes increase, with a positive income elasticity of demand.

Question 15

Inferior Goods

Answer 15

Goods whose demand decreases as consumer incomes increase, with a negative income elasticity of demand.

Question 16

Speculation

Answer 16

Buying or selling decisions based on anticipations of future prices.

Question 17

Self-Fulfilling Speculation

Answer 17

When the actions of speculators cause the anticipated effect on prices.

Question 18

Futures or Forward Market

Answer 18

A market for contracts to buy or sell at a future date at a price agreed today.

Question 19

Short Selling (or Shorting)

Answer 19

Borrowing an asset to sell it, then buying it back later at a lower price to make a profit.

Question 20

Future Price vs Spot Price

Answer 20

Future price is agreed upon today for future exchange, while spot price is the current market price.

Question 21

Minimum Price (or ‘Floor’)

Answer 21

A government-set price level that cannot fall below a certain point.

Question 22

Maximum Price (or ‘Ceiling’)

Answer 22

A government-set price level that cannot rise above a certain point.

Question 23

Indirect Tax

Answer 23

A tax on expenditure on goods, paid indirectly by consumers via sellers.

Question 24

Specific Tax vs Ad Valorem Tax

Answer 24

Specific tax is a fixed sum per unit sold, while ad valorem tax is a percentage of the price of the good.