Price Elasticity

Question 1

What is price elasticity for demand?

Answer 1

Elasticity measures the responsiveness of the QD to change in price.

Question 2

What is the formula for PED

Answer 2

% change in quantity demanded

% change in price

Question 3

PED>1

Answer 3

Elastic

Question 4

PED<1

Answer 4

Inelastic

Question 5

PED = 1

Answer 5

Unit elasticity

Question 6

PED = 0

Answer 6

Perfectly inelastic

Question 7

PED = infinity

Answer 7

perfectly elastic

Question 8

Is the PED normally negative or positive for normal goods

Answer 8

For all Normal goods, PED will be negative, as there
is a negative relationship between price and
quantity on a downward-sloping demand curve.
We always ignore this negative sign.

Question 9

What does elastic demand look like?

Answer 9

A change in price leads to a more than
proportionate change in quantity demanded.

Question 10

What does inelastic demand look like?

Answer 10

A change in price leads to a less than proportionate
change in quantity demanded.

Question 11

What does unit elastic demand look like?A

Answer 11

A change in price leads to an equal proportionate
change in quantity demanded.

Question 12

What does perfectly inelastic demand look like?

Answer 12

A change in price leads to no change on the
quantity demanded.

Question 13

What does perfectly elastic demand look like?

Answer 13

A change in price will lead to an infinite change in
quantity demanded.

Question 14

What are the 4 determinants of PED (CLiP iT)

Answer 14

• Closeness of substitutes.
• Luxury or necessity.
• Percentage of income spent on the good.
• Time period.

Question 15

Closeness of substitutes affect PED

Answer 15

PED will be more price elastic
if there are close substitutes available.

Question 16

Luxury or necessity affect PED

Answer 16

Luxury goods tend to be price
elastic, and necessities tend to be price inelastic.

Question 17

Percentage of income spent on the good affect PED

Answer 17

The smaller
the percentage of income spent on a good, the more
price inelastic the demand will be.

Question 18

Time period affect PED

Answer 18

In the long run, demand tends to be more
price elastic, as it takes time for consumers to react to
price changes.

Question 19

What is income elasticity?

Answer 19

Income elasticity of demand measures the
relationship between a change in quantity
demanded and a change in income.

Question 20

How do you calculate income elasticity (YED)?

Answer 20

Percentage change in quantity demanded of good X

percentage change in real consumers’ income

Question 21

income elasticity of normal good

Answer 21

positive

Question 22

Necessities income elasticity

Answer 22

0 -> +1

Demand rises with income, but
less than proportionately.

Question 23

Luxuries income elasticity

Answer 23

> +1

Demand rises more than
proportionate to a change in income

Question 24

Inferior goods income elasticity

Answer 24

negative

Question 25

What is PES?

Answer 25

Responsiveness of quantity supplied to changes in price

Question 26

How to calculate PES

Answer 26

Question 27

What does inelastic supply look like

Answer 27

Question 28

PES of elastic supply

Answer 28

Elastic Supply PES \>1

Question 29

PES of inelastic supply

Answer 29

Inelastic Supply PES \<1

Question 30

Unit Elasticity PES

Answer 30

Unit Elastic Supply PES =1

Question 31

Perfectly inelastic supply PES

Answer 31

Perfectly Inelastic Supply PES 0

Question 32

Perfectly elastic supply PES

Answer 32

Perfectly Elastic Supply PES undefined

Question 33

What does elastic supply look like?

Answer 33

Question 34

What does Perfect elastic supply look like?

Answer 34

Question 35

What does perfect inelastic supply look like?

Answer 35

Question 36

4 Determinants of PES (TUMA)

Answer 36

* Time period * Unused capacity * Mobility of factors of production * Ability to keep stock

Question 37

Time Period on PES

Answer 37

If production can be increased fast, then PES is elastic. Ifproduction cannot be increased fast, then PES is inelastic Over time PES becomes more ELASTIC

Question 38

Mobility of factors of production on PES

Answer 38

Mobilise = how easy it is to increase production Low mobility -\> INELASTIC High mobility -\> ELASTIC

Question 39

Unused Capacity on PES

Answer 39

Unused capacity = When a business is not using all its resources Unused Capaciy -\> ELASTIC

Question 40

Ability to keep stock on PES

Answer 40

Perisable goods -\> INELASTIC Storable goods -\> ELASTIC

Question 41

What is e cross price elasticity of demand (XED)

Answer 41

The cross price elasticity of demand is used to measure the effect a change in price of one product has on the demand for a certain other good.

Question 42

How to calculate XED

Answer 42

Question 43

Meanings of XED value

Answer 43

If XED is positive they are subsitute goods If XED is negative they are complementary goods