elasticity

Question 1

price elasticity of demand formula

Answer 1

%change in quantity demanded/ % change in price

Question 2

elastic demand
3 features

Answer 2

value of PED>1
% change in price causes a larger % in QD
the higher the PED value is, the more elastic demand is for the good

Question 3

perfectly elastic demand
3 features

Answer 3

PED is infinite
increase in price means D will fall to 0.
C willing to buy all they can contain at p1 but not at a higher price

Question 4

characteristics of elastic goods (6)

Answer 4

many substitutes
luxuries
large portion of income
elasticity over 1
time to decide if you want it
Sensitive to change in price- most goods have this in the long run

Question 5

inelastic demand
3 features

Answer 5

PED is between 0 and 1
% change in price will cause a smaller % change in QD
the smaller the PED value, the more inelastic a good is

Question 6

perfectly inelastic demand
2 features

Answer 6

PED of 0
Any change in price will have no effect in QD

Question 7

characteristics of inelastic goods (5)

Answer 7

few substitutes
necessities
small portion of income
elasticity 0-1
required now rather than later
Insensitive to change in price – most goods have this in the short run

Question 8

unit elasticity

Answer 8

PED is 1
% change in the price will cause the same % change in demand.

Question 9

income elasticity of demand formula

Answer 9

% change in QD of a good/ % change in real income

Question 10

price elasticity of supply formula

Answer 10

%change in QS/ % change in price

Question 11

% change in QS

Answer 11

change in supply/ original supply

Question 12

% change in price

Answer 12

change in price/ orig price

Question 13

general characteristics of elastic supply (5)

Answer 13

Easy to produce
Low barriers to entry (many firms)
Low cost or generic input
Easy to switch from producing alternate goods
Elasticity coefficient more than 1

Question 14

general characteristics of inelastic supply (5)

Answer 14

Hard to produce
High barriers to entry (few firms producing the product)
High cost or specialized inputs
Hard to switch as not a lot of goods
Elasticity coefficient less than 1

Question 15

Determinants of PES- market period

Answer 15

immediate after a change in price. Supply is highly inelastic because firms cant immediately produce more of a good due to the lack of fops

Question 16

Determinants of PES-Short run
1 feature

Answer 16

firms capacity is fixed and so is at least 1 factor of production. supply slightly more elastic

Question 17

Determinants of PES-long run
1 feature

Answer 17

firms have time to vary the amount of capital they use so supply is highly elastic. In the long run an increase in price will result in a much greater increase in QS than in the market period or the short run

Question 18

determinants of PES- the mobility of resources

Answer 18

if resources (labour and capital) can be quicky put into or taken out of production, supply tends to be more elastic. Generally this applies to low skilled manufactured goods the supply of which is more elastic than high-tech, capital-intensive manufactured goods

Question 19

determinants of PES- The ability to store stocks

Answer 19

If storage costs are low, suppliers can store excess inventory during periods of low demand and release it onto the market when demand increases (non-perishable goods). Goods that are perishable or have a limited shelf life may have a lower elasticity of supply because they cannot be stored for long periods without deteriorating in quality or value.

Question 20

what does YED measure

Answer 20

how much the demand of a good changes with a change in real income

Question 21

what is an inferior good

Answer 21

goods that have a negative YED. As income rises, demand falls. A rise in income will mean that inferior good will be replaced by a substitute considered better quality

Question 22

what is a normal good

Answer 22

positive YED- as income rises so does demand. the size of the demand increase is dependent on the products elasticity. (0<YED>1) everyday consumer products such as clothing, electronics, restaurant meals, entertainment, and vacations. As consumers' incomes increase, they tend to spend more on these goods and services, leading to higher demand.</YED>

Question 23

what is a superior good

Answer 23

product that people demand more of as they their incomes grow- luxury products e.g top of the range sports car. If the YED of a product is elastic (YED>1) then its a luxury (superior) good they tend to allocate a larger proportion of their budget to purchasing superior goods.

Question 24

example of an elastic good

Answer 24

luxury item e.g holiday

Question 25

example of inelastic good

Answer 25

demand don't change much with the price e.g petrol

Question 26

example of perfectly inelastic good

Answer 26

quantity demanded or supplied of a good remains constant regardless of changes in its price. e.g life changing medicine

Question 27

example of unit elastic good (not specific)

Answer 27

an essential good with lots of substitutes e.g a banana as if the price dropped by 10% then the demand for banana will increase by 10%

Question 28

example of perfectly elastic good

Answer 28

luxury products, such as jewels, gold, and high-end cars, since their demand is very sensitive to price changes

Question 29

consumer surplus meaning

Answer 29

Area below the demand curve and above the equilibrium price line The difference between the price that a consumer is willing to pay for a good or service and the price they actually pay (the equilibrium price)

Question 30

producer surplus

Answer 30

Area above the supply curve and below the equilibrium price line The difference between the price that a producer is willing to supply a good or service at and the price that they actually worth on the market (the equilibrium price)

Question 31

types of market equilibrium

Answer 31

stable unstable neutral

Question 32

what is market equilibrium

Answer 32

Price and output are stable Supply is equal to demand

Question 33

what is market disequilibrium

Answer 33

Supply and demand are not equal- excess supply and demand in the market

Question 34

Cross- Price Elasticity of Demand XED

Answer 34

Measure of how the quantity demanded of one good responds to the change in price of another good

Question 35

Formula for Cross- Price Elasticity of Demand XED

Answer 35

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

Question 36

Does demand contract or extend when prices rise

Answer 36

Contract

Question 37

Does demand contract or extend when prices fall

Answer 37

Extends

Question 38

elasticity definition

Answer 38

a measure of the responsiveness of the quantity demanded of a product or service to changes in its price

Question 39

relationship between inelastic ped and a firms total revenue

Answer 39

when firms increase the price of an inelastic good, the demand will decrease but that much so they are receiving more revenue as people are still buying it e.g petrol

Question 40

usefulness of p (price) ed (demand) (3)

Answer 40

Firms utilise price elasticity of demand to determine the optimal pricing strategy for their products allowing them to have the greatest revenue possible helps economists and businesses understand how consumers react to price changes. helps in forecasting changes in demand due to price changes. It provides insights into how changes in price might affect sales volume, allowing firms to make more accurate predictions about future revenue and adjust production accordingly

Question 41

usefulness of y (income) ed (2)

Answer 41

economists can make predictions about future consumption patterns, economic trends, and the overall direction of the economy. helps economists and businesses understand how consumers adjust their spending patterns as their incomes change- understanding these relationships is crucial for forecasting consumer behaviour and making informed business decisions.

Question 42

usefulness of x (cross) ed (2)

Answer 42

helps determine whether two goods are substitutes or complements. If the cross elasticity is positive, it indicates that the goods are substitutes, meaning an increase in the price of one good leads to an increase in the demand for the other. Conversely, if the cross elasticity is negative, it suggests the goods are complements, meaning an increase in the price of one good reduces the demand for the other. Understanding the elasticity between their product and competitors' products helps in setting competitive prices. For example, if a firm discovers that its product has a high cross elasticity with a competitor's product, it might need to adjust its pricing strategy to remain competitive (e.g decreasing it so consumers buy from them)

Question 43

usefulness of p (price) es (supply) (2)

Answer 43

PES is crucial for infrastructure planning, particularly in industries where significant lead times are required to increase production capacity. Understanding the elasticity of supply helps in making informed decisions about investing in infrastructure and capacity expansion. If the supply of a good is highly elastic (PES > 1), firms can easily adjust their production in response to changes in price, maximizing profitability. Conversely, if supply is inelastic (PES < 1), firms may struggle to adjust production quickly, leading to potential shortages or surpluses.

Question 44

what is ceteris paribus mean

Answer 44

''all other things being equal'' as long as all the other factors remain constant the

Question 45

pes formula

Answer 45

%change in qs/%change in price

Question 46

are substitutes or compliments positive

Answer 46

positive

Question 47

how do we know this

Answer 47

If the price of B goes up, demand for A goes up Coke & Pepsi

Question 48

are substitutes or compliments negative

Answer 48

compliments

Question 49

why

Answer 49

If the price of B goes up, demand for A goes down Printers & Ink

Question 50

what would the value of a strong subsitute be

Answer 50

around 1.5 for example- higher, more stronger elastic people will switch more quicker

Question 51

what would the value of a weak compliment be

Answer 51

around 0.2 suggests people are not strongly tied to consuming them together

Question 52

disadavantage of ped- time

Answer 52

time sensitivity- PED can vary over time. In the short run, demand might be inelastic, but in the long run it could become more elastic as consumers find alternatives. E.g. Petrol demand is inelastic in the short term, but in the long run people might switch to electric vehicles. A price rise may not affect demand immediately, but it could lead to a larger fall in quantity demanded over time. Firms must be cautious: what looks profitable now could hurt market share later.

Question 53

disadvantage of ped- exploitation

Answer 53

can exploit consumers with high prices if inelastic as theyre gaining extra rev that consumers will have to pay e.g CEO of british gas increased its prices and then gave himself a pay rise of £8.2 million. unethical, consumer welfare loss esp those on lower incomes as can lead to lower discretionary income may force government intervention posing an opportunity cost

Question 54

disadvantage of yed

Answer 54

Consumers don’t always instantly change their consumption habits when income changes. Time lags can make YED less reliable for short-term business planning. depending on economy they may not increase consumption or switch from inferior goods as may have incentive to save due to higher interest rate etc

Question 55

how is yed changing over time a disadvantage

Answer 55

A product’s YED isn’t fixed. As it becomes more common or cheaper, it can shift from being a luxury to a necessity. E.g. Mobile phones used to be luxury goods (high YED), but now they’re seen as essential (lower YED). This means past data may not reflect future behavior. lacks temporal validity

Question 56

whats a disadvantage of xed in terms of consumer preference

Answer 56

Strong brand loyalty can reduce how responsive consumers are to the price changes of substitute goods. This means XED might understate the true substitutability between two goods if consumers are emotionally attached to one brand. E.g. Even if Pepsi gets cheaper, loyal Coca-Cola drinkers might not switch — lowering the XED even though the products are technically substitutes.

Question 57

whats another to do with the relatiosnhip of the goods

Answer 57

The XED value for Good A with respect to Good B might not be the same as for Good B with respect to Good A. This makes interpretation more complex. E.g. The demand for printers might be very sensitive to the price of ink, but ink demand might not change much if printers get cheaper. if consumers already own one complimetary good, it may mean the demand for other may only increase over time as one may be a long term purchase could misjudge the strength of relationship as they also may be weak compliments or substitutes

Question 58

whats a disadvantage of pes about other factors

Answer 58

PES doesn’t consider other factors like availability of raw materials, labor shortages, or production capacity limits which can massively affect supply governments may put caps on firms for producing pver a certain amount which this doesnt consider

Question 59

whats another

Answer 59

Supply tends to be more elastic in the long run because firms can adjust their production processes. In the short run, it's often inelastic – but PES doesn't always make that clear. immediate after a change in price. Supply is highly inelastic because firms cant immediately produce more of a good due to the lack of fops firms have time to vary the amount of capital they use so supply is highly elastic. In the long run an increase in price will result in a much greater increase in QS than in the market period or the short run