APPECO LESSON 4

Question 1

 A ____ is when there is an excess demand for the quantity supplied. While
surplus is excess in supply.

Answer 1

shortage

Question 2

E.g., if there are 10 bottles of water & there are 20 students who want drinking
these, then there will be only 10 students whose demands are met while the
others will not be able to be given anything.

Answer 2

There is shortage in the supply.

Question 3

If producers make too many bottles of water & consumers cannot by them want
to buy them, _____

Answer 3

there will be surplus.

Question 4

 Explains the interaction between the sellers of a product & the buyers. It shows
the relationship between the availability of a particular product & the desire (or
demand) for that product has on its price.

Answer 4

The Law of Supply & Demand

Question 5

____ measures the responsiveness of the quantity demanded or
supplied of a good to a change in its price.

Answer 5

Price elasticity

Question 6

Elasticity can be described as (2)

Answer 6

a) Elastic (or very responsive)
b) Unit elastic / Inelastic (or not very responsive)

Question 7

Effects of Change in Demand & Supply
(3)

Answer 7

1. ELASTIC DEMAND
2. INELASTIC DEMAND
3. UNITARY ELASTICITY

Question 8

 Or supply curve indicates that quantity demanded or supplied respond to price
changes in a greater than proportional manner.

Answer 8

A. Elastic Demand

Question 9

 Or supply curve is one where a given percentage change in price will cause a
smaller percentage change in quantity demanded or supplied.

Answer 9

B. Inelastic Demand

Question 10

 Means that a given percentage changes in prices leads to an equal percentage
change in quantity demanded or supplied.

Answer 10

C. Unitary Elasticity

Question 11

Categories of Price Elasticity (4)

According to Agarwal, P. (2018) & Judge, S. (2020),

Answer 11

1) The Price Elasticity of Demand
2) The Income Elasticity of Demand (YED)
3) Cross Price Elasticity of Demand (XED)
4) Price Elasticity of Supply (PES)

Question 12

 Is the responsiveness of quantity demanded, or how much quantity demanded
changes, given a change in the price of goods or services.

Answer 12

I. The Price Elasticity of Demand

Question 13

*The mathematical value is negative. A negative value indicates an inverse
relationship between price & the quantity demanded. But the negative sign is
ignored (Judge, S. 2020).

Answer 13

I. The Price Elasticity of Demand

Question 14

I. The Price Elasticity of Demand (5)

Answer 14

1. ELASTIC DEMAND
2. INELASTIC DEMAND
3. UNITARY ELASTIC DEMAND
4. PERFECTLY ELASTIC
5. PERFECTLY INELASTIC

Question 15

The percentage change in price brings about a
more than proportionate change in quantity
demanded.

Answer 15

a) Elastic Demand (PED > 1) –

Question 16

– (coefficient of the elasticity is less than 1), is when an
increase in price causes a smaller % fall in demand.

Answer 16

b) Inelastic Demand

Question 17

– When the percentage change in quantity demanded is
less than the percentage change in price, & the
coefficient of the elasticity is less than 1.

Answer 17

b) Inelastic Demand

Question 18

– e.g., Gasoline has few alternatives; people with cars
consider it as a necessity & they need to buy gasoline.
There are weak substitutes, such as train riding, walking
& buses. If the price of gasoline goes up, demand is very
inelastic. Other Examples: Diamonds, aircon, Iphone,
Cigarettes.

Answer 18

b) Inelastic Demand

Question 19

– When the percentage change in demand is equal
to the percentage change in price, the product is
said to have ____

Answer 19

c) Unitary Elastic Demand

Question 20

– – PED or the price elasticity of
demand is 1

Answer 20

Unitary elastic

Question 21

– A small percentage change in rpcie brings aobut a
change in quantity demanded from zero to infinity. –

Answer 21

d) Perfectly Elastic

Question 22

– the coefficient of elasticity is equal to infinity (∞).

Answer 22

d) Perfectly Elastic

Question 23

The PED is = 0 any change in price will not have any
effect on the demand of the product. –

Answer 23

e) Perfectly Inelastic –

Question 24

– the percentage change in demand will be equal to zero
(0).

Answer 24

e) Perfectly Inelastic –

Question 25

 The midpoint elasticity is less than 1. (Ed < 1). Price reduction leads to reduction in the total revenue of the firm.

Answer 25

Point Elasticity

Question 26

 The demand curve is linear (straight line), it has a unitary elasticity at the midpoint. The total revenue is maximum at this point.

Answer 26

Point Elasticity

Question 27

 Any point above the midpoint has elasticity greater than 1, (Ed > 1).

Answer 27

Point Elasticity

Question 28

is the relationship between changes in quantity demanded for a good & a change in real income.

Answer 28

II. The Income Elasticity of Demand (YED)

Question 29

.  YED = % change in demand, % change in income

Answer 29

II. The Income Elasticity of Demand (YED)

Question 30

II. The Income Elasticity of Demand (YED) (2)

Answer 30

1. NORMAL GOODS 2. INFERIOR GOODS

Question 31

 Are those goods for which the demand rises as consumer income rises; positive income elasticity of demand so as consumers’ income rises.

Answer 31

A. Normal Goods

Question 32

 YED is positive. As income rises, the proportion spent on cheap goods will reduce as now they can afford to buy more expensive goods

Answer 32

A. Normal Goods

Question 33

 E.g., (the demand for units of air-conditioning increases as the income of the consumer increases & the demand for electric fan decreases).

Answer 33

A. Normal Goods

Question 34

____ Goods: units of air-conditioning; ____ Goods: electric fan

Answer 34

Normal, Inferior

Question 35

 The demand decreases when consumer income rises; demand increases when consumer income decreases.

Answer 35

B. Inferior Goods

Question 36

 Shifts to the left as income rises. YED is negative. As income rises, the proportion spent on cheap goods will reduce as now they can afford to buy more expensive goods.

Answer 36

B. Inferior Goods

Question 37

 E.g., the demand for cheap/generic electronic goods (let’s say electric fans – will fall as people income rises & they will switch to expensive branded electronic goods (unit of air-conditioning)

Answer 37

B. Inferior Goods

Question 38

____ is the effect on the change in demand of one good as a result of a change in price of related to another product.

Answer 38

 Cross price elasticity of demand

Question 39

o XED = % change in quantity demanded of good (X), % change in price of good (Y)

Answer 39

 Cross price elasticity of demand

Question 40

If the value of XED is positive –

Answer 40

substitute goods

Question 41

 If the value of XED is negative –

Answer 41

complements goods

Question 42

 If the value of XED is zero –

Answer 42

two goods are unrelated

Question 43

 The measure of the responsiveness of quantity to a change in price. It is the percentage change in supply as compared to the percentage change in price of a commodity.

Answer 43

IV. Price Elasticity of Supply (PES)

Question 44

o PES = % change in quantity supplied, % change in price

Answer 44

IV. Price Elasticity of Supply (PES)

Question 45

Determinants of Price Elasticity of Supply (5) Agarwal, P. (2020) said, price elasticity of supply can be influenced by the following factors:

Answer 45

1. Marginal Cost: 2. Time: 3. No. of Firms: 4. Mobility of Factors of Production: 5. Capacity:

Question 46

: If the cost of producing one more unit keeps rising as output rises or marginal cost rises rapidly with an increase in output, the rate of output production will be limited. The Price Elasticity of Supply will be inelastic – the percentage of quantity supplied changes less than the change in price. If Marginal Cost rises slowly, supply will be elastic

Answer 46

1. Marginal Cost

Question 47

: Over time price elasticity of supply tends to become more elastic. The producers would increase the quantity supplied by a larger percentage than an increase in price.

Answer 47

Time

Question 48

: The larger the no. of firms, the more likely the supply is elastic. The firms can jump in to fill in the void in supply.

Answer 48

No. of Firms

Question 49

: If factors of production are movable, the price elasticity of supply tends to be more elastic. The labor & other inputs can be brought in from other location ton increase the capacity quickly

Answer 49

Mobility of Factors of Production

Question 50

: If firms have spare capacity, the price elasticity of supply is elastic. The firm can increase in costs, & quickly with a change in price.

Answer 50

Capacity