Elasticity

Question 1

what is elasticity

Answer 1

a measure of how buyers and sellers respond to changes in market system

Question 2

demand is said to be elastic if ….

Answer 2

quantity demanded responds substantially to a change in price

Question 3

demand is said to be inelastic if …

Answer 3

quantity demanded responds slightly to a change in rpice

Question 4

define the elasticity of demand

Answer 4

a measure of how much the quantity demanded of a good responds to change in price of that good

Question 5

how to calculate price elasticity of demand

Answer 5

ped = % change in demand / % change in price

Question 6

is PED always negative or positive

Answer 6

negative so we use its absolute value

Question 7

if ped is less than 1 is it elastic or inelastic

Answer 7

inelastic (does not respond strongly to changes)

Question 8

if ped is greater than 1 is it elastic or inelastic

Answer 8

elastic (responds strongly to changes)

Question 9

what determines price elasticity of demand

Answer 9

Availability of substitutes
Necessities/luxuries
definition of the market
time horizon
income

Question 10

does availability of close substitutes make demand curve more elastic or inelastic

Answer 10

elastic as people will easily switch to the close substitutes

Question 11

do necessities have an elastic or inelastic demand curve

Answer 11

inelastic as people still need to use them eg electricity

Question 12

do luxuries have a n elastic or inelastic demand curve

Answer 12

elastic as people will stop buying if prices rise too much

Question 13

How does definition of the market effect price elasticity of demand

Answer 13

eg narrow categories tend to have a more elastic demand curve eg ice cream. General categories eg food don’t

Question 14

does time make a curve more elastic or inelastic

Answer 14

more elastic overtime eg change in price in petrol wont have an immediate effect but over time people will drive less or drive hybrid cars

Question 15

general rule, the steeper the demand curve the more …. it is

Answer 15

elastic

Question 16

perfectly price inelastic is in what shape

Answer 16

I

Question 17

what does perfectly price inelastic mean

Answer 17

the quantity demanded does not repsond to the change in price

Question 18

example of goods that are perfectly price inelastic

Answer 18

necessities with no substitutes eg medicine

Question 19

what is the PED of a perfectly price inelastic demand curve

Answer 19

0

Question 20

what is the PED of a perfectly price elastic demand curve

Answer 20

infinity

Question 21

perfectly price elastic is in what shape

Question 22

what does perfectly price elastic mean

Answer 22

the price is constant

Question 23

examples of perfectly price elastic

Answer 23

goods with a perfect substitute eg electricity historically when there was only one supplier

Question 24

what is unit price elastcity

Answer 24

quantity demanded changes by the same percentage of the price (PED =1)

Question 25

If given a specific brand name will it be elastic or inelastic

Answer 25

elastic (easily switch to another brand)

Question 26

why are goods/services more elastic over time

Answer 26

changes are hard to make in a short period of time where as over time its easier to change

Question 27

examples of changes over time on the supply side

Answer 27

Building new factories and hiring new workers

Question 28

does the tax burden fall on the more elastic or inelastic side of the curve

Answer 28

inelastic as the elastic will move away and reduce demand when prices are increased with tax. Where as inelastic wont move away eg cigarrette smokers are addicted so wont respond to the price changes

Question 29

example of inelastic supply

Answer 29

water, food

Question 30

example of elastic supply

Answer 30

harvested goods, land can be used for other foods. This is usually done too (Crop rotation)

Question 31

an example of how elasticity is useful

Answer 31

elasticity allows us to think in percentage terms eg changing the amount of time that people have to be living apart before they get divorced say by 20%, by what percentage would divorce rates increased by