Elastcities

Question 1

What does elasticity of demand measure

Answer 1

Responsiveness of quantity demanded in repsonse to price, income and other goods

Question 2

What does it mean if demand is elastic

Answer 2

Change in price will cause a larger change in demand

Question 3

unitary elastic PED

Answer 3

= 1 = both change exactly the same

Question 4

perfectly elastic PED

Answer 4

= infinity = small change in price causes demand to fall to 0

Question 5

What does it mean if demand is inelastic

Answer 5

Change in price will cause a smaller change in demand

Question 6

calculation for PED

Answer 6

Change in quantity demanded / change in Price

Question 7

perfectly inelastic PED

Answer 7

= 0 = change in price has no effect on demand

Question 8

Factors that influence price elasticity of demand

Answer 8

Substitutes - more substitutes makes a good more elastic
Type of goods - essential and habitual goods may be more inelastic
Percentage of income spent - larger proportion of income is more price elastic like a fridge
Time - long run demand is more elastic as it becomes easier to change to alternatives

Question 9

Significance of PED

Answer 9

Significant in the imposition of taxes and subsidies

Question 10

When demand is inelastic who mainly receives the tax burden

Answer 10

The consumer as the demand curve is more vertical

Question 11

When demand is elastic who mainly receives the tax burden

Answer 11

The Producer as the demand curve is more horizontal

Question 12

How does an taxing an inelastic demand curve affect the government

Answer 12

They receive more revenue as consumers demand for the product won’t change much

Question 13

How does taxing an inelastic demand curve affect firms

Answer 13

Their production of the good won’t change very much so quantity won’t decrease by a lot and output will remain the same

Question 14

What does a subsidy do to elastic goods

Answer 14

Larger change in output and smaller fall in price for consumer, larger increase in revenue, more expensive for government

Question 15

What does a subsidy do to inelastic goods

Answer 15

Price falls a larger amount, little change in output and cheaper for the government

Question 16

What happens to revenue with an elastic demand curve

Answer 16

decrease in price leads to increase in revenue

Question 17

What happens to revenue with an inelastic demand curve

Answer 17

decrease in price leads to decrease in revenue

Question 18

What is the calculation for YED

Answer 18

Percentage change in quantity demanded / percentage change in real income

Question 19

Inferior good YED

Answer 19

YED<0 when a rise in income leads to fall in demand

Question 20

Normal good YED

Answer 20

YED>0 when a rise in income leads to rise in demand for the good

Question 21

Luxury good YED

Answer 21

YED>1 when larger rises of income increase demand for a good

Question 22

for Income when is a good inelastic or elastic

Answer 22

Bigger than 1 = elastic
Smaller than 1 = inelastic

Question 23

Significant of YED

Answer 23

• Important for firms to know how income changes in the country will affect their own sales
• Can impact the type of good a firm may produce

Question 24

XED calculation

Answer 24

Percentage change in quantity demanded of good A / Percentage change in price of good B

Question 25

Substitute goods XED

Answer 25

XED>0 increase in price of B will increase demand for good A

Question 26

Complementary goods XED

Answer 26

XED<0 increase in price of good B all decrease demand for good A

Question 27

Unrelated goods XED

Answer 27

XED = 0

Question 28

Significance of XED

Answer 28

firms must be aware of their competition and complementary firms, to know how price changes will affect their own demand

Question 29

Price elasticity of supply

Answer 29

Responsiveness in supply to a change in price

Question 30

PES calculation

Answer 30

percentage change in quantity supplied / percentage change in price

Question 31

Factors that affect PES

Answer 31

- when unemployment is high supply is more elastic as it’s easier to recruit workers - perishable goods have inelastic supply - Firms with high stockpile levels have elastic supply - industries with more mobile factors of production will have more elastic supply - working below full capacity - easier entry to the market makes supply more elastic

Question 32

Why is high PES important to firms

Answer 32

So firms can respond to price and demand changes quickly by making their supply elastic so it is more responsive, done through having spare production capacity.

Question 33

PES in the short run

Answer 33

Can be difficult to increase production in the short run due to a time lag as factors of production may be fixed so supply is inelastic

Question 34

PES in the long run

Answer 34

All factors of production are variable so firms can increase production capacity which makes supply more elastic

Question 35

how does an inelastic curve shift affect the change to the equilibrium point

Answer 35

greater impact on price

Question 36

how does an elastic curve shift affect the change to the equilibrium point

Answer 36

greater impact on quantity