Demand, PED, YED, XED and interrelationships between markets

Question 1

Define demand

Answer 1

The quantity of a good/service consumers are willing and able to buy at a given price in a given time period.

Question 2

What is the ‘Law of Demand’?

Answer 2

There is an inverse relationship between price and quantity demanded. As price increases, Qd decreases and vice versa assuming ceteris paribus.

Question 3

Why does demand have a downward slope?

Answer 3

• Income effect

- Substitution Effect

Question 4

A change in price causes a…

Answer 4

movement along the demand curve.

Question 5

What cause changes in demand?

Answer 5

PASIFIC:
Population
Advertising
Substitutes Prices
Income
Fashion/tastes
Interest rates
Complements price

Question 6

What is PED?

Answer 6

Price Elasticity of Demand measures the responsiveness of quantity demanded given a change in price.

Question 7

What is the equation for PED?

Answer 7

% change in Qd/ % change in P

Question 8

How do you calculate percentage change?

Answer 8

Difference/original x 100 (New - initial/initial x 100)

Question 9

PED is always…

Answer 9

negative - Law of Demand - price and quantity inversely related.

Question 10

PED:

> 1 means…

Answer 10

Demand is price elastic.

Question 11

PED:

< 1 means…

Answer 11

Demand is price inelastic.

Question 12

PED:

0 means…

Answer 12

Demand is perfectly price inelastic.

Question 13

PED:

Infinity means…

Answer 13

Demand is perfectly price elastic.

Question 14

PED:

1 means…

Answer 14

Demand is unit price elastic.

Question 15

PED:

Steep demand curve means…

Answer 15

demand is price inelastic.

Question 16

PED:

Shallow demand curve means…

Answer 16

demand is price elastic.

Question 17

PED:

Exactly vertical demand curve means…

Answer 17

demand is perfectly price inelastic.

Question 18

PED:

Exactly horizontal demand curve means…

Answer 18

demand is perfectly price elastic.

Question 19

How can it be determined whether demand for a good/service is price elastic or price inelastic?

Answer 19

SPLAT
Substitutes - the more substitutes = more price elastic
Percentage of income - the greater the % of income = more price elastic
Luxury/Necessity - Luxury = more price elastic, Necessity = price inelastic
Addictive/habit forming - Addictive = price inelastic, habit forming = inelastic
Time period = short run - Inelastic, long run - elastic as more substitutes become available

Question 20

What does a change in price mean if a good/service is price inelastic?

Answer 20

A smaller percentage change in demand.

Question 21

What does a change in price mean if a good/service is price elastic?

Answer 21

A larger percentage change in demand.

Question 22

What happens if price increases and total revenue decreases?

Answer 22

Price increase will cause Qd to drop significantly - selling a lot less at a slightly higher price.

Question 23

What happens if price decreases and total revenue increases?

Answer 23

Price decrease will cause Qd to increase massively - selling much more at slightly reduced price.

Question 24

What happens if both price and total revenue increase?

Answer 24

Price increase will cause Qd to fall but only by a small amount - selling a little bit less but at a much higher price

Question 25

What happens if both price and total revenue decrease?

Answer 25

Price decrease will only cause Qd to increase by a small amount, selling only a bit more but at a much lower price.

Question 26

If the demand curve is price elastic, and price falls, will more revenue be gained or lost?

Answer 26

Gained.

Question 27

If the demand curve is price inelastic, and price rises, will more revenue be gained or lost?

Answer 27

Gained.

Question 28

Define YED

Answer 28

Income Elastic of Demand measures the responsiveness of quantity demanded given a change in income.

Question 29

What is the equation for YED?

Answer 29

% change in Qd/ % change in income

Question 30

Normal Goods are...

Answer 30

positive - YED > 0

Question 31

Inferior Goods are...

Answer 31

negative - YED < 0

Question 32

YED - normal good: | > 1 means...

Answer 32

demand is income elastic - NORMAL LUXURY - if income rises demand for the normal good will increase proportionally less than the increase in income.

Question 33

YED - normal good: | < 1 means...

Answer 33

demand is income inelastic - NORMAL NECESSITY - if income rises demand for this normal good will increase proportionally more than the increase in income.

Question 34

YED - inferior good: | > 1 means...

Answer 34

Demand is income elastic.

Question 35

YED - inferior good: | < 1 means...

Answer 35

Demand is income inelastic.

Question 36

Define XED.

Answer 36

Cross Elasticity of Demand measures the responsiveness of quantity demanded of a good/service given a change in price of another good/service.

Question 37

Substitutes are...

Answer 37

postive. (PSNC)

Question 38

Complements are...

Answer 38

negative. (PSNC)

Question 39

XED: | > 1 means...

Answer 39

demand between the goods/services is price elastic (strongly related) - when the prince of Good A changes, the Qd of Good will change but proportionally more than change in price of Good A.

Question 40

XED: | < 1 means...

Answer 40

demand between the goods/services is price inelastic (weakly related) - if the price of Good A changes, the Qd of Good B will change but proportionally less.

Question 41

XED: | 0 means...

Answer 41

demand between the goods/services is perfectly inelastic (no relationship).

Question 42

Define joint demand.

Answer 42

Joint demand is when the demand for one product is directly and positively related to market demand for a related good or service. Two complements are said to be in joint demand and the cross price elasticity of demand is negative. Complements - e.g printers & ink, coffee, razors & blades.

Question 43

Define composite demand.

Answer 43

Two goods require the same input to be produced.

Question 44

Define derived demand.

Answer 44

When the demand for one good/services comes from something else (input demand) - when demand for one increases, demand for input increases.

Question 45

Define competitive demand.

Answer 45

Demand for products have close substitutes.

Question 46

Luxury goods are...

Answer 46

positive - YED > 1

Question 47

What is the income effect?

Answer 47

How the price change affects consumer income. If price rises, it effectively cuts disposable income, and there will be lower demand for the good because of this fall in disposable income.

Question 48

What is the substitution effect?

Answer 48

An increase in the price of a good will encourage consumers to buy alternative goods. The substitution effect measures how much the higher price encourages consumers to buy different goods, assuming the same level of income.

Question 49

What is the relationship between PED and total revenue?

Answer 49

EOIS - Elastic only irritates skin - Elastic opposite - Inelastic same