Price Elasticity

Question 1

What does Price Elasticity of Demand (PED) measure?

Answer 1

Measures how sensitive the quantity demanded is to a change in the price of a product.

Question 2

What is the formula for Price Elasticity of Demand (PED)?

Answer 2

PED = (% change in quantity demanded) / (% change in price)

Question 3

What does |PED| > 1 indicate?

Answer 3

Elastic: Quantity demanded changes more than price.

Question 4

What does |PED| < 1 indicate?

Answer 4

Inelastic: Quantity demanded changes less than price.

Question 5

What does |PED| = 1 indicate?

Answer 5

Unit Elastic: Proportional change.

Question 6

What does PED = 0 indicate?

Answer 6

Perfectly Inelastic: No change in quantity demanded.

Question 7

What does PED = ∞ indicate?

Answer 7

Perfectly Elastic: Demand changes infinitely with price.

Question 8

If price increases by 10% and demand decreases by 20%, what is PED?

Answer 8

PED = -2 → Elastic demand.

Question 9

What is the shape of the demand curve in relation to elasticity?

Answer 9

Downward-sloping demand curve; elasticity changes along the curve.

Question 10

What factor affects PED related to substitutes?

Answer 10

More substitutes = more elastic.

Question 11

How does the nature of the product affect PED?

Answer 11

Necessities are inelastic, luxuries are elastic.

Question 12

What is the relationship between the proportion of income spent and PED?

Answer 12

Higher proportion = more elastic.

Question 13

How does the number of uses of a product affect its elasticity?

Answer 13

More uses = more elastic.

Question 14

How do habit-forming products affect PED?

Answer 14

Inelastic.

Question 15

What is the effect of time on PED?

Answer 15

More time to respond = more elastic demand.

Question 16

What does Price Elasticity of Supply (PES) measure?

Answer 16

Measures how sensitive the quantity supplied is to a change in the price of a product.

Question 17

What is the formula for Price Elasticity of Supply (PES)?

Answer 17

PES = (% change in quantity supplied) / (% change in price)

Question 18

What does PES > 1 indicate?

Answer 18

Elastic supply.

Question 19

What does PES < 1 indicate?

Answer 19

Inelastic supply.

Question 20

What does PES = 1 indicate?

Answer 20

Unit Elastic.

Question 21

What does PES = 0 indicate?

Answer 21

Perfectly Inelastic.

Question 22

What does PES = ∞ indicate?

Answer 22

Perfectly Elastic.

Question 23

If price increases by 10% and quantity supplied increases by 20%, what is PES?

Answer 23

PES = 2 → Elastic supply.

Question 24

What is the shape of the supply curve in relation to elasticity?

Answer 24

Upward-sloping supply curve; steeper = inelastic, flatter = elastic.

Question 25

What time period effect does PES have?

Answer 25

Long-run = more elastic, short-run = inelastic.

Question 26

How do expectations of future prices affect PES?

Answer 26

Higher future prices → more elastic now.

Question 27

What is the effect of storability of goods on PES?

Answer 27

More storable = more elastic.

Question 28

How does the availability of inputs affect PES?

Answer 28

Scarcity = inelastic supply.

Question 29

What does Income Elasticity of Demand (YED) measure?

Answer 29

Measures how demand changes when consumer income changes.

Question 30

What is the formula for Income Elasticity of Demand (YED)?

Answer 30

YED = (% change in quantity demanded) / (% change in income)

Question 31

What does YED > 0 indicate?

Answer 31

Normal goods.

Question 32

What does YED < 0 indicate?

Answer 32

Inferior goods.

Question 33

What does YED = 0 indicate?

Answer 33

No change in demand.

Question 34

What is an example of a normal good?

Answer 34

Jewelry = normal good (positive YED).

Question 35

What is an example of an inferior good?

Answer 35

Brown bread = inferior good (negative YED).

Question 36

What does Cross Elasticity of Demand (XED) measure?

Answer 36

Measures how demand for one good changes with a price change in another good.

Question 37

What is the formula for Cross Elasticity of Demand (XED)?

Answer 37

XED = (% change in quantity demanded of Good A) / (% change in price of Good B)

Question 38

What does XED > 0 indicate?

Answer 38

Substitutes (e.g. tea and coffee).

Question 39

What does XED < 0 indicate?

Answer 39

Complements (e.g. DVDs and DVD players).

Question 40

What does XED = 0 indicate?

Answer 40

Unrelated goods.

Question 41

What happens to the demand for tea if the price of coffee increases?

Answer 41

Demand for tea ↑ → XED > 0 (substitute).

Question 42

What is elastic demand?

Answer 42

An elastic demand is one in which the change in quantity demanded due to a change in price is large

Question 43

What is inelastic demand?

Answer 43

An inelastic demand is one in which the change in quantity demanded due to a change in price is small.