Elasticities

Question 1

What equation is used to calculate PED?

Answer 1

PED = percentage change in quantity demanded / percentage change in price.

Question 2

Between what values is demand for a product price inelastic?

Answer 2

Between 0 and 1.

Question 3

For what values is demand for a product price elastic?

Answer 3

When the PED value is more than 1.

Question 4

For what value is PED price unit elastic?

Answer 4

When PED equals 1.

Question 5

What values of PED are given when demand for a product is perfectly price elastic and inelastic, respectively?

Answer 5

Perfectly elastic = ∞.

Perfectly inelastic = 0.

Question 6

What factors may affect the price elasticity of demand?

Answer 6

• Availability of substitutes.
• Proportion of income spent on a product.
• Degree of Necessity of product
• Durability of product.
• Length of time under consideration.
• Breadth of definition of a product.

Question 7

How is PED significant to firms?

Answer 7

If a firm knows whether the price elasticity of demand for a product is elastic or inelastic then they know whether increasing or decreasing prices will result in a higher total revenue.

Question 8

How is PED significant to the government?

Answer 8

If a government wishes to maximise it’s tax revenue then it may increase it’s taxes on goods whose demand is price inelastic.

Question 9

Define Cross Elasticity of Demand (XED).

Answer 9

Cross elasticity of demand is a measure of the sensitivity of the quantity demanded of one product to a change in the price of another product.

Question 10

What equation is used to obtain a value for XED?

Answer 10

XED = percentage change in quantity demanded of product Y / percentage change in price of product X.

Question 11

If an XED value is positive, what link is there between the two products?

Answer 11

The products are substitutes for one another.

Question 12

If an XED value is negative, what link is there between the two products?

Answer 12

The products are compliments for one another.

Question 13

Define Income Elasticity of Demand.

Answer 13

Income elasticity of demand is the sensitivity of the quantity demanded of a product to a change in real income.

Question 14

What equation gives a value for YED?

Answer 14

YED = percentage change in quantity demanded / percentage change in real income.

Question 15

What does a positive value of YED indicate?

Answer 15

That the good is a normal good.

Question 16

What does a negative value of YED indicate?

Answer 16

That the good is an inferior good.

Question 17

Define Price Elasticity of Demand (PED).

Answer 17

Price elasticity of demand is a measure of the sensitivity of the quantity demanded of a product to a change in it’s own price.

Question 18

Define Price Elasticity of Supply.

Answer 18

Price elasticity of supply is a measure of the sensitivity of supply of a product to a change in it’s price.

Question 19

What equation gives a value to PES?

Answer 19

PES = percentage change in quantity supplied / percentage change in price.

Question 20

What factors affect price elasticity of supply?

Answer 20

• Time
• Stocks
• Spare capacity
• Availability and cost of switching resources from one use to another.

Question 21

Define consumers’ surplus.

Answer 21

Consumers’ surplus is the difference between how much consumers are willing pay and what they actually pay for a product.

Question 22

How is consumers’ surplus shown diagrammatically?

Answer 22

It is the area under the demand curve and above the market price.

Question 23

Define producers’ surplus.

Answer 23

Producers’ surplus is the difference between the cost of supply and the price received by the producer for the product.

Question 24

How is producers’ surplus shown diagrammatically?

Answer 24

It is the area between the supply curve and the market price.

Question 25

How is availability of substitutes a factor affecting PED?

Answer 25

The more substitutes there are, the more elastic demand is, the fewer substitues, the more inelastic.

Question 26

How is proportion of income a factor affecting price elasticity of demand?

Answer 26

The higher the proportion of income, the more price elastic

Question 27

How is degree of necessity a factor affecting price elasticity of demand?

Answer 27

The more necessary a good, e.g. insulin, the more inelastic. The less necessary, the more elastic

Question 28

How is time a factor affecting price elasticity of demand?

Answer 28

The longer after a price change, the more price elastic, because consumers have time to find substitutes that are cheaper

Question 29

How is breadth of definition a factor affecting price elasticity of demand?

Answer 29

Specific things like quinoa will be very price elastic, and broad things like ‘grains’ or even ‘food’ will be very price inelastic, relatively.

Question 30

How is spare/excess capacity a factor affecting price elasticity of supply?

Answer 30

Unused capacity, assuming variable factors are available, can be quickly used to respond to price changes in the market

Question 31

How can inventory stocks affect PES?

Answer 31

If a producer has a stock of goods then it can respond to price increases more quickly by releasing the stocks

Question 32

How is the ease of switching resources a factor affecting PES?

Answer 32

if a producer can quickly switch their resources towards creation of a product in demand, supply is elastic

Question 33

How is time a factor affecting PES?

Answer 33

The longer the time, the more elastic the supply because suppliers can change to producing more/less of a good if they are given enough time