Elasticities

Question 1

What is the meaning of PED

Answer 1

A measure of the responsiveness of the quantity demanded of a good or service to a change in it’s price

Question 2

What is the value and meaning of PED elastic

Answer 2

A change in price leads to a proportionately greater change in QD. PED > 1

Question 3

What is the value and meaning of PED inelastic?

Answer 3

( PED < 1 ) A change in price leads to a proportionately smaller change in the quantity demanded.

Question 4

What is the meaning and value of PED unitary elastic

Answer 4

A change in price leads to a proportionately equal change in the quantity demanded (PED = 1)

Question 5

What is the meaning and value of PED perfectly inelastic?

Answer 5

A change in price leads to no change in the quantity demanded (PED = 0)

Question 6

What is the meaning and value of PED perfectly elastic?

Answer 6

Any change in price would lead to an infinite change in the quantity demanded. (PED = ∞ )

Question 7

What is the formula to calculate PED?

Answer 7

( percentage change in QD / percentage change in price ) x 100

Question 8

What are the determinants of PED?

Answer 8

S - substitutes
P - proportion of income spent
L - luxury or necessity
A - addictiveness
W - width of the market
T - time period for consumers to change/adapt

Question 9

If the price of a good or a service changes, how will this impact firms?

Answer 9

Affect total revenue, however the impact depends on the PED of the good

Question 10

If the product is PED elastic, what should the firm do if they wish to increase TR?

Answer 10

Not raise prices

Question 11

If the product is PED inelastic, what should the firm do if they wish to increase TR?

Answer 11

Raise prices of the good

Question 12

If the product is PED unitary elastic, what should the firm do if they wish to increase TR?

Answer 12

Unable to increase TR by changing the price, as price of product increases, QD falls by the same percentage (proportion) and TR will remain the same

Question 13

Does PED varies along the curve or it IS the slope of the demand curve?

Answer 13

The value of PED varies along the curve (it’s price range)

Question 14

Along the upper half of a linear, downward-sloping demand curve, demand is?

Answer 14

price elastic, as price rises, the percentage changes in price will get progressively smaller. As QD declines in the same range of the demand curves, percentage changes will also increase.

Question 15

Show the changes in revenue as a result of price increase/decrease when demand is price elastic

Answer 15

• A small decrease in price leads to a larger increase in QD
• TR is higher once the price has been decreased

Question 16

Show the changes in revenue as a result of price increase/decrease when demand is price elastic

Answer 16

• Large increase in price leads to smaller decrease in QD
• TR is higher once price has been increased