Price elasticity of demand and supply

Question 1

Elasticity of demand

Answer 1

A measure of how much quantity demanded of a good or service changes in response to a change in another variable, such as price or income.

Question 2

PED formula

Answer 2

%change QD / %change Price

Question 3

PED > 1 name and meaning

Answer 3

Price elastic demand
A change in price leads to a proportionately greater change in the quantity demanded.

Question 4

0 <PED <1

Answer 4

Price inelastic demand
A change in price leads to a proportionately smaller change in the quantity demanded.

Question 5

PED = 1

Answer 5

Unitary elastic demand
A change in price leads to a proportionately equal change in the quantity demanded.

Question 6

PED = 0

Answer 6

Perfectly inelastic demand
A change in price leads to no change in the quantity demanded.

Question 7

Ped = infinite

Answer 7

Perfectly elasric
Any change in price would lead to an infinite change in the quantity demanded.

Question 8

Determinants of price elasticity of demand (4)

Answer 8

1. Number and closneses of substitutes
2. Nececity
   3.Time period
3. proportion of. income spend

Question 9

PED NPD - Number and clossenes of substitutes

Answer 9

More substitures –> more elastic
More similar subsitutres –> more elastic

Question 10

PED NPD - degree of nececity

Answer 10

The greater the level of necessity for the consumer, the more inelastic the demand of the good will be.

The more widely a good is defined, the more inelastic is its demand.

Question 11

PED NPD - time period

Answer 11

The demand for a good will be more inelastic in a short period of time than in a longer period of time.

as consumers do not have time to look ofr alternatives in short run

Question 12

Deterinants of PED def

Answer 12

determinants of price elasticity of demand (PED) influence how sensitive the quantity demanded of a good is to changes in its price.

Question 13

When PED is inelastic consumers pay..

Answer 13

When the demand is relatively inelastic, the tax incidence falls more on consumers than producers.

consumers –> more
producers –> less

Question 14

when PED is elastic consumers pay .. producers pay..

Answer 14

When the demand is relatively elastic, the tax incidence falls more on producers than consumers.

producers –> more
consumers –> less

Question 15

Goverment earns more revenue when.. PED

Answer 15

for a good is inelastic

Question 16

When PED for a good is inelatstc and subsidy or tax is imposed…

Answer 16

less change unless major tax

Question 17

When PED for a good is elastic and subsidy or tax is imposed…

Answer 17

More impact on production and consumption

Question 18

YED - income elasticity of demand

Answer 18

A measure of how much quantity demanded of a good or service changes in response to an income change.

Question 19

YED formula

Answer 19

%Change QD / %change Income (Y)

Question 20

YED is positive (YED > 0)

Answer 20

As incomes increase, quantity demanded of a good increases; and as incomes decrease, quantity demanded decreases.
NORMAL GOOD

Question 21

YED is negative (YED < 0)

Answer 21

as incomes increase, quantity demanded of a good decreases; and conversely, as incomes decrease, quantity demanded increases.
INFERIOR GOOD

Question 22

YED < -1
YED > 1

Answer 22

Income elastic demand

A change in income leads to a proportionately greater change in the quantity demanded.

Question 23

–1 < YED < 1

Answer 23

Income inelastic demand

A change in income leads to a proportionately smaller change in the quantity demanded.

Question 24

YED = 0

Answer 24

Perfectly income inelastic demand
A change in income leads to no change in the quantity demanded.

(Goods with a positive YED value close to zero are considered necessity goods.)

graph: linea recta

Question 25

YED = 1

Answer 25

A change in income leads to a proportionately equal change in the quantity demandeD

Question 26

Importance of YED for firms

Answer 26

In periods of economic recession, goods and services with the highest YED (YED > 1) will be the ones whose demand and quantity demanded will suffer the largest fall.

However, products with low YED (YED < 1) may avoid a large reduction in sales, and inferior goods (YED < 0) are likely to experience an increase.

Question 27

YED and sectoral change

Answer 27

As the economy grows and achieves higher levels of national income , the demand for manufactured goods will increase more rapidly (with higher YED) than demand for agricultural products (with lower YED), as consumers are likely to have met their basic needs.

When an economy achieves a high level of national income, consumers will spend disproportionately more in the tertiary sector (even higher YED) than in the primary and secondary sectors.

Question 28

PES

Answer 28

A measure of how much the quantity supplied of a good changes when there is a change in its own price.

Question 29

PES FORMULA

Answer 29

%chnageQS/ %changeP

Question 30

PES is alwats

Answer 30

a positive number because the price and the quantity supplied always move in the same direction.

Question 31

PES > 1

Answer 31

Price elastic supply
A situation where a change in price leads to a proportionately greater change in the quantity supplied.

Question 32

0 < PES < 1

Answer 32

Price inelastic supply
A situation where a change in price leads to a proportionately smaller change in the quantity supplied.

Question 33

PES = 1

Answer 33

A situation where a change in price leads to an equal change in the quantity supplied.

Question 34

PES = 0

Answer 34

Perfectly inelastic
A situation where a change in price leads to no change in the quantity supplied.

Question 35

PES = ∞

Answer 35

Perfectly eleastic
A situation where a tiny change in price would lead to an infinite change in the quantity supplied.

Question 36

Determinants of PES (4)

Answer 36

Time period
Mobility of factors of production
Unused capacity
ability to store stock

Question 37

NPD PES Time period

Answer 37

The longer the time period considered, the more elastic the supply will be.

Question 38

NPD PES Mobility and cost of factors of production

Answer 38

The greater the mobility (flexibility) and lower cost of factors of production, the more elastic the supply will be.

Question 39

NPD PES Unused capacity

Answer 39

The greater the spare (unused) capacity, the more elastic the supply will be.

Question 40

NPD PES ability to store stock

Answer 40

If a firm has the capacity to store stock, which means keeping inventories of a good in a warehouse, the supply can be more responsive to a change in price.