Product market

Question 1

when is PED/PES perfectly inelastic?

Answer 1

0

Question 2

when is PED/PES inelastic?

Answer 2

between 0 and -1

Question 3

when is PED/PES unit elastic?

Answer 3

-1

Question 4

when is PED/PES elastic?

Answer 4

between -1 and -infinity

Question 5

when is PED/PES perfectly elastic?

Answer 5

-infinity

Question 6

name 5 factors that change how elastic PED is

Answer 6

1. substitutability of the good (more substitutes –>more elastic)
2. necessity for the good (necessities are more inelastic)
3. short run vs long run (demand more elastic in long run)
4. proportion of income (bigger proportion means more inelastic)
5. habit goods (more inelastic)

Question 7

name 4 factors that affect elasticity of supply

Answer 7

1. level of spare capacity (working below capacity means very elastic)
2. sustainability of factors of production (if easily switchable, elastic)
3. Stock (if there is a lot, firm can quickly ship it out - elastic)
4. time (in LR they can switch multiple factors of production, so more elastic than in SR)

Question 8

YED < 0 when

Answer 8

inferior good

Question 9

0 < YED < 1 when

Answer 9

necessity

Question 10

YED > 1 when

Answer 10

luxury good

Question 11

YED > 0 when

Answer 11

normal good (goods whose demand increases when real incomes rise)

Question 12

Define XED

Answer 12

the responsiveness of a q demanded of a good/service to a change in price of another good/service

Question 13

what is the equation for XED

Answer 13

% change in Q of good A / % change in price of good B

Question 14

what does a negative XED mean

Answer 14

complements

Question 15

what does it mean if XED = 0

Answer 15

unrelated goods

Question 16

what are the three functions of the price mechanism

Answer 16

1. incentive - prices provide agents with incentives to alter their behaviour e.g. higher prices incentivise firms producing more
2. rationing - allocation of scarce resources
3. signalling - prices signal information to consumers and firms about a market

Question 17

define effective demand

Answer 17

when a consumers desire to buy a good is backed up by his ability to afford it

Question 18

what is derived demand

Answer 18

when a good or factor of production e.g. labour is demanded because of demand for other goods

Question 19

what is a giffen good?

Answer 19

where increase in price of the basic item leads to an increase in demand - because the very poor cannot afford to buy other goods

Question 20

what do you call a good where an increase in price leads to an increase in demand because people now believe it is better?

Answer 20

an ostentatious good

Question 21

what is composite demand

Answer 21

a good demanded for by multiple different uses

Question 22

what is joint demand?

Answer 22

goods bought together

Question 23

what causes shifts in demand?

Answer 23

1. income
2. quality of good
3. ads
4. substitutes and complements
5. weather
6. expectations

Question 24

what causes shifts in supply?

Answer 24

1. decrease in cost of production
2. more firms enter the market
3. investment in capacity
4. related supply
5. weather
6. tech improvements
7. lower taxes
8. govt subsidies

Question 25

what is the substitution effect

Answer 25

if a good increases in price, it will become relatively more expensive, and consumers will switch to other cheaper goods

Question 26

what is the income effect

Answer 26

if a good increases in price, the increase in price reduces the disposable income of the consumer, and thus lower income may reduce demand