Chapter 8/9/10

Question 1

What is price elasticity of demand (PED)?

Answer 1

How responsive quantity demanded for a product is when price changes.

Question 2

If a demand curve is straighter is it more or less elastic?

Answer 2

Straighter= Less elastic

Question 3

What’s the difference between elastic and inelastic demand?

Answer 3

Elastic- when the change in price is less than change in Qd.
Inelastic- when the change in price is greater than change in Qd.

Question 4

How do we calculate PED?

Answer 4

% change in Qd/ % change in price

Question 5

If PED < 1 what does it mean? e.g -0.5

Answer 5

Inelastic demand

Question 6

If PED > 1 what does it mean? e.g - 2.5

Answer 6

Elastic demand

Question 7

PED = 0
PED= ∞
PED= -1

Answer 7

0- Perfectly inelastic (Vertical graph)
∞- Perfectly elastic (Horizontal graph)
-1- Unitary elasticity

Question 8

Define unitary elasticity

Answer 8

When the responsiveness of demand is proportionately equal to change in price. TR never changes.

Question 9

What factors effect the PED?

Answer 9

1. Substitutes
2. Proportion of income
3. Luxury/necessity
4. Addictive
5. Time

Question 10

How does the availability of substitutes affect the PED of a product?

Answer 10

If there are many close substitutes it will be price elastic since consumers will have many options to choose from.

Question 11

How does the proportion of income spent on the product affect PED?

Answer 11

If proportion of income spent is higher, people will be willing to wait for the price to drop so its price elastic.

Question 12

How does time affect the PED for a product?

Answer 12

If goods are needed soon, price is inelastic
If goods can wait till the long-term, price is elastic

Question 13

What is Price elasticity of supply (PES)?

Answer 13

Responsiveness of supply to a change in price

Question 14

If the supply curve is straighter is PES more or less responsive?

Answer 14

Straighter curve= Less responsive

Question 15

What is the difference between inelastic and elastic supply?

Answer 15

Inelastic supply- When change in price is greater than in change in Qs
Elastic supply- When change in Qs is greater than change in price

Question 16

How do we calculate PES?

Answer 16

% change in Qs/ % change in price

Question 17

If PES> 1 what does it mean?

Answer 17

Elastic supply

Question 18

If PES < 1 what does it mean?

Answer 18

Inelastic supply

Question 19

PES = 0
PES = Infinite
PES = 1

Answer 19

0 - Perfectly inelastic (Vertical graph)
Infinite - Perfectly elastic (Horizontal)
1 - Unitary elasticity

Question 20

What factors affect PES?

Answer 20

1. Factors of production
2. Availability of stocks
3. Spare capacity
4. Time

Question 21

How does availability of stocks influence PES?

Answer 21

If its impossible/ expensive to hold stocks e.g fruits are perishable, PES= inelastic

Question 22

How does spare capacity influence PES?

Answer 22

If there is spare capacity and price for the product increases, producers can increase supply. If there’s spare capacity= PES is elastic.

Question 23

How does time influence PES?

Answer 23

If producers can react quickly to change in price (less time needed to increase supply), PES is elastic. If not (e.g. fruits), PES= inelastic

Question 24

How do the factors of production influence PES?

Answer 24

If the factors of production can be increased quickly then PES= elastic

Question 25

What is income elasticity of demand?

Answer 25

The responsiveness of demand to a change in income

Question 26

How do we calculate for income elasticity of demand?

Answer 26

% change in demand / % change in income

Question 27

How can we use Income elasticity of demand to interpret the nature of a product?

Answer 27

Basic goods- Income inelastic Luxury goods- Income elastic Inferior goods- Negative PES value Normal goods- Positive PES value

Question 28

When will governments place indirect taxes on products?

Answer 28

When the PED is inelastic and they want to make a profit. Or when they want the demand for products (e.g. cigarettes) to be smaller.

Question 29

When will governments provide subsidies to businesses?

Answer 29

When they want to increase supply of a product to make the good cheaper. Demand must be price inelastic.