Elasticity

Question 1

What is Price Elasticity of Demand (PED)?

Answer 1

Price Elasticity of Demand (PED) measures the responsiveness of the quantity demanded of a good or service to a change in its price.

Question 2

What is the formula to calculate PED?

Answer 2

PED = % Change in Quantity Demanded / % Change in Price

Question 3

How do you calculate percentage change in quantity demanded?

Answer 3

Percentage change in quantity demanded = (New Quantity - Original Quantity) / Original Quantity × 100

Question 4

How do you calculate percentage change in price?

Answer 4

Percentage change in price = (New Price - Original Price) / Original Price × 100

Question 5

What characterizes Price Elastic Demand?

Answer 5

Price Elastic Demand (PED > 1): Demand is responsive to price changes. The demand curve is flatter.

Question 6

What characterizes Price Inelastic Demand?

Answer 6

Price Inelastic Demand (PED < 1): Demand is less responsive to price changes. The demand curve is steeper.

Question 7

What does Perfect Price Inelasticity (PED = 0) mean?

Answer 7

Quantity demanded does not change regardless of the price change.

Example: Life-saving drugs.

Question 8

What does Price Inelasticity (0 < PED < 1) indicate?

Answer 8

Demand is not highly responsive to price changes. A price increase results in a smaller decrease in quantity demanded.

Question 9

What is Unitary Price Elasticity (PED = 1)?

Answer 9

The percentage change in quantity demanded is equal to the percentage change in price.

Question 10

What does Price Elasticity (PED > 1) indicate?

Answer 10

Demand is highly responsive to price changes. A price increase results in a larger decrease in quantity demanded.

Question 11

What does Perfect Price Elasticity (PED = ∞) mean?

Answer 11

Any change in price results in an infinite change in quantity demanded. The demand curve is horizontal.

Question 12

What factors influence PED?

Answer 12

Substitutes, Degree of Necessity, Percentage of Income Spent, and Time.

Question 13

What is Total Revenue (TR)?

Answer 13

Total Revenue (TR) = Price × Quantity Sold

Question 14

What happens to total revenue with Elastic Demand (PED > 1)?

Answer 14

A price increase leads to a decrease in total revenue; a price decrease leads to an increase in total revenue.

Question 15

What happens to total revenue with Inelastic Demand (PED < 1)?

Answer 15

A price increase leads to an increase in total revenue; a price decrease leads to a decrease in total revenue.

Question 16

What is Price Elasticity of Supply (PES)?

Answer 16

Price Elasticity of Supply (PES) measures the responsiveness of the quantity supplied to a change in the price of a good or service.

Question 17

What is the formula to calculate PES?

Answer 17

PES = % Change in Quantity Supplied / % Change in Price

Question 18

What characterizes Price Elastic Supply?

Answer 18

Price Elastic Supply (PES > 1): Supply is highly responsive to price changes. The supply curve is flatter.

Question 19

What characterizes Price Inelastic Supply?

Answer 19

Price Inelastic Supply (PES < 1): Supply is less responsive to price changes. The supply curve is steeper.

Question 20

What does Perfect Price Inelasticity (PES = 0) mean?

Answer 20

Quantity supplied does not change regardless of price.

Example: Land.

Question 21

What does Price Inelasticity (0 < PES < 1) indicate?

Answer 21

Supply does not increase significantly with price increases.

Question 22

What is Unitary Price Elasticity (PES = 1)?

Answer 22

The percentage change in quantity supplied is equal to the percentage change in price.

Question 23

What does Price Elasticity (PES > 1) indicate?

Answer 23

Supply is highly responsive to price changes. A price increase leads to a larger increase in quantity supplied.

Question 24

What does Perfect Price Elasticity (PES = ∞) mean?

Answer 24

Any change in price causes an infinite change in quantity supplied. The supply curve is horizontal.

Question 25

What factors influence PES?

Answer 25

Factors of Production, Availability of Stocks, Spare Capacity, and Time.

Question 26

What is Income Elasticity of Demand (YED)?

Answer 26

Income Elasticity of Demand (YED) measures the responsiveness of the quantity demanded of a good or service to a change in consumer income.

Question 27

What is the formula to calculate YED?

Answer 27

YED = % Change in Quantity Demanded / % Change in Income

Question 28

What does Luxury Goods (YED > 1) indicate?

Answer 28

Income elastic goods, where demand increases more than proportionately as income rises. ## Footnote Example: Expensive cars.

Question 29

What are Normal Goods (0 < YED < 1)?

Answer 29

Demand increases with income, but at a proportionally smaller rate. ## Footnote Example: Clothing.

Question 30

What are Inferior Goods (YED < 0)?

Answer 30

Demand decreases as income increases. ## Footnote Example: Generic brands.

Question 31

What is the significance of price and income elasticities of demand to businesses?

Answer 31

Imposition of Indirect Taxes and Subsidies can affect demand based on elasticity.