Ch 2B

Question 1

Definition of elasticity.

Answer 1

Elasticity is a measure used to show the degree of responsiveness of quantity demanded or quantity supplied of a good or service to a change in one of the determinants of demand or supply.

Question 2

What are the 4 types of elasticity concepts used in Economics?

Answer 2

1. PED, price elasticity of demand
2. YED, income elasticity of demand
3. XED, cross elasticity of demand
4. PES, price elasticity of supply

Question 3

Definition of price elasticity of demand (PED).

Answer 3

Price elasticity of demand (PED) measures the degrees of responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus.

Question 4

Formula of PED.

Answer 4

PED value= % change in qty dd/ % change in price

Question 5

Sign of coefficient of PED.

Answer 5

always negative, due to law of demand (inverse relationship b/w qty dd & price)

Question 6

Magnitude of coefficient of PED.

Answer 6

|PED|>1 (dd is price elastic) (less steep)
0<|PED|<1 (dd is price inelastic) (steeper)
(-ve gradient)
~ for a given change in price, qty dd change more/ less than proportionately.

Question 7

Factors affecting PED

Answer 7

1. availability and closeness of substitutes
2. degree of necessity
3. proportion of income spent on the product
4. time period considered ( consumers need time to adjust their consumption behaviour, more substitutes may be developed, durability, technological change takes time)

Question 8

Definition of total revenue (TR).

Answer 8

Total Revenue (TR) refers to the total receipts received by producers from the sales of goods and services before the deduction of taxes or any other costs.

Question 9

Formula of TR

Answer 9

TR = P x Q

Question 10

Definition of income elasticity of demand (YED).

Answer 10

Income Elasticity of Demand (YED) measures the degree of responsiveness of demand of a good to a change in income, ceteris paribus.

Question 11

Factors affecting YED.

Answer 11

1. necessity vs luxury goods
2. level of income of consumers

Question 12

Definition of cross elasticity of demand (XED).

Answer 12

Cross Elasticity of Demand (XED) measures the degree of responsiveness of demand of one good (good A) to a change in the price of another good (good B), ceteris paribus.

Question 13

Factors affecting XED.

Answer 13

closeness of the substitute or complement

Question 14

Definition of price elasticity of supply (PES).

Answer 14

Price Elasticity of Supply (PES) measures the degree of responsiveness of quantity supplied of a good to changes in its price, ceteris paribus.

Question 15

Factors affecting PES.

Answer 15

1. time period (SR/LR)
2. existence of spare capacity
3. availability and durability of stocks
4. length of production period
5. factors mobility
6. proportion of marginal cost of production as output changes

Question 16

Limitations of the use of elasticity concepts.

Answer 16

1. assumption of ceteris paribus
2. reliability and accuracy of elasticity data
3. interaction between demand and supply