Elasticity

Question 1

elasticity

Answer 1

responsiveness - what will the change be

Question 2

formula for XED

Answer 2

%change in QD of good (A) / %change in P of good (B)

Question 3

What influences XED?

Answer 3

Substitutes (+ sign)
complements (- sign)
unrelated (0)

Question 4

Importance of XED

Answer 4

useful as it can help determine whether or not it is a good move to increase or decrease selling prices, or to substitute one produce for another to increase revenue

Question 5

If your XED is low…

Answer 5

…you have far more freedom to change your prices. Businesses will relish a low XED, may allow a monopoly to develop

Question 6

If XED is very high (+5)

Answer 6

Putting up prices is going to leak an awful lot of customers

Question 7

Cross elasticity of Demand (XED)

Answer 7

Responsiveness of quantity demanded of one product to changes in the price of another good

Question 8

XED value
Below -1
Between -1 and 0
0
Between +0 and +1
Above +1

Answer 8

Strong complement 
Weak complement 
No relationship between two goods
Weak substitute 
Strong substitute

Question 9

Formula for PES

Answer 9

%change in QS / %change in P

Question 10

Importance of PES

Answer 10

Useful for a firm to know quickly, and effectively it can respond to changing market conditions, especially to price changes

Question 11

Factors affecting PES

Answer 11

Production lag
Substitutability of FoPs
Spare capacity 
Stocks
Time period

Question 12

If the PES is less than one, the good is…

Answer 12

Inelastic- the price has gone up (e.g. by 10%) supply has risen a little (5%)

Question 13

If the PES is greater than one, the good is…

Answer 13

Highly elastic- as the price goes up a great deal, more produce is released on to the market

Question 14

Price elasticity of supply (PES)

Answer 14

Responsiveness of quantity supplied of a product to changes in the price of that product

Question 15

Complements

Answer 15

Products that are bought alongside another product

E.g. milk for tea and coffee

Question 16

Complements (XED) what would the sign be?

Answer 16

When XED is negative, the goods are complementary products

Question 17

Substitutes (XED) what would the sign be?

Answer 17

When XED positive, the related goods are substitutes

The bigger the number the closer the substitute

Question 18

Formula for YED

Answer 18

%change in QD / %change in (Y)

Question 19

Importance of YED

Answer 19

Useful for businesses to know as this will help them decide what goods to produce and how a change in overall income in the economy affects the QD for their product

Question 20

Income elasticity of demand (YED)

Answer 20

Responsiveness of QD for products to changes in the levels of disposable income in an economy

Question 21

1) When income rises, demand for inferior goods…

2) When income falls, demand for inferior goods…

Answer 21

1) falls

2) rise

Question 22

YED value
Below -1
Between -1 and 0
0
Between 0 and 1
Above 1

Answer 22

• Income Elastic inferior good
• Income Inelastic inferior good
• No relationship between income and QD
• Income Inelastic normal good (necessity)
• Income Elastic normal good (Luxury)

Question 23

High YED (+3)

Answer 23

QD varies considerably with income changes

Elastic normal good (luxury)

Question 24

Low YED (+0.3)

Answer 24

Inelastic normal good (necessity)

As income increases QD decreases but proportionally less

Question 25

Negative YED (-1)

Answer 25

Elastic Inferior good, RDI +, QD decreases

Question 26

Factors of YED

Answer 26

1) Necessity | 2) Luxury

Question 27

For PED and PES if less than 1 it is...

Answer 27

...price inelastic

Question 28

For PED and PES if greater than 1 it is...

Answer 28

...price elastic

Question 29

For PED and PES if infinite it is...

Answer 29

...perfectly price elastic

Question 30

For PED and PES if 0 it is...

Answer 30

...perfectly price inelastic

Question 31

Formula for PED

Answer 31

%change in QD / %change in P

Question 32

Importance of PED

Answer 32

Important that businesses know this, whether changing the prices will affect revenue negatively/positively

Question 33

Factors affecting PED

Answer 33

- Substitutability - Time - Type of good (addiction, e.g. cigarettes, more price inelastic due to addiction) (unnecessary goods, e.g. kitchen roll, more price elastic)

Question 34

If price elastic for PED what would the demand curve look like on a graph?

Answer 34

flat curve

Question 35

If price inelastic for PED what would the demand curve look like on a graph?

Answer 35

steep/vertical curve

Question 36

Price elasticity of Demand (PED)

Answer 36

Responsiveness of QD to the changes in price

Question 37

What relationship does a normal good have with income and QD?

Answer 37

Positive relationship Income increases demand will increase, if income decreases demand will decrease

Question 38

What relationship does inferior goods have with income and QD?

Answer 38

Inverse relationship Income increases demand for inferior goods will decrease

Question 39

How to remember XED whether it’s a substitute or complementary?

Answer 39

Party (positive) Season (substitute) Near (negative) Christmas (complementary)