Elasticities of Demand

Question 1

PED

Answer 1

The responsiveness of demand to a change in price

Question 2

PED Formula

Answer 2

PED=%ΔQD/%p

Question 3

Why is PED always negative?

Answer 3

As the price of a good increases, the demand falls, and vice versa. Therefore there is a -ve relationship due to the law of demand.

Question 4

If a good is price elastic, this means that…

Answer 4

For a fall in price of the good, quantity demanded rises by a larger proportion.
To increase total revenue, the price of the good must decrease

Question 5

If a good is price inelastic, this means that…

Answer 5

For a increase in the price of the good, quantity demanded falls by a smaller proportion, (and vice versa).
To increase Total Revenue, the price of the good must increase.

Question 6

Unitary Elasticity (-1) means that

Answer 6

A change in the price charged leads to no change in total revenue

Question 7

Total Revenue Equation

Answer 7

Price x Quantity Demanded

Question 8

PES

Answer 8

The responsiveness to supply to a change in price

Question 9

PES Formula

Answer 9

PES=%ΔQuantity Supplied/%ΔPrice

Question 10

YED

Answer 10

How Demand changes according to a change in consumer’s income.

Question 11

YED Formula

Answer 11

YED=%ΔQuantity Demanded/%ΔIncome

Question 12

XED

Answer 12

The responsiveness of demand for Good X, to the change in price of Good Y. Good X and Good Y are substitutes

Question 13

XED Formula

Answer 13

XED=%ΔQD for Good X/%ΔP for Good Y