2.2 Elasticities

Question 1

What is elasticity

Answer 1

is how responsive something is to a change in something else. It measures how easily consumers or producers can change their behavior.

Question 2

Price Elasticity of demand (PED)

Answer 2

responsiveness of a quantity demanded to a change in price, ceteris paribus.

Question 3

how to calculate PED

Answer 3

change in quantity demanded
change in price of product

Question 4

Coefficients

Answer 4

PED is negative - they are inversely related (e.g. as one goes up, the other goes down)
PED is positive - positively related. giffen and veblen goods
PED > 1 elastic
PED < 1 inelastic
PED = 1 Unit elastic
PED = 0 Perfectly inelastic
PED = infinite Perfectly elastic

Question 5

Determinants of Price elasticity

Answer 5

Time Period - more time = more elastic
income - higher priced = more elastic
necessity or luxury - more specific = more elastic
substitutes - more substitutes = more elastic

Question 6

Revenue calculations

Answer 6

PxQ

Question 7

Why is PED significant for decision making of firms and the government

Answer 7

companies look at elasticity because it can determine how much they can change their prices and which direction to change their prices in.

Question 8

Income Elasticity of demand (YED)

Answer 8

Responsiveness of a quantity demanded to a change in a consumer’s income, ceteris paribus.
YED = % change of quantity demanded
% change in income of consumer

Question 9

If YED is ___ then ___? Coefficients

Answer 9

If YED is negative - they are inferior goods
If YED is positive - they are normal goods
YED > 1 Income elastic - high elasticity = less essential, more luxurious
YED < 1 Income inelastic - low elasticity = more essential, necessities
YED = 1 Unit income elastic (proportionate change)
YED = 0 Perfectly income inelastic