1.12 PED and PES

Question 1

What is demand?

Answer 1

Demand is the quantity of goods or services that consumers are willing to purchase at a given price and a given time period

Question 2

What is derived demand?

Answer 2

• • It is the demand for a factor of production used to produce another good or service

Question 3

What is effective demand?

Answer 3

Effective demand is when a desire to buy a product is backed up by having an ability to pay

Question 4

What is joint demand?

Answer 4

Joint demand is when demand for one product is positively related to demand for a related good or service e.g. fish and chips, they are complementary

Question 5

What is composite demand

Answer 5

Composite demand is where a product has more than one use, an increase in demand for one product leads to a fall in supply of the other.

Question 6

What is the price elasticity of demand?

Answer 6

PED measures the responsiveness of demand given a change in price

Question 7

What is the equation for price elasticity of demand?

Answer 7

Percentage change in quantity demanded / percentage change in price

Question 8

When is PED elastic?

Answer 8

It is when the PED value is greater than 1

Question 9

When is PED inelastic?

Answer 9

Between 0 and 1

Question 10

When is PED unitary elastic?

Answer 10

When the PED value is 1

Question 11

When is PED value perfectly elastic?

Answer 11

When the PED value is 0

Question 12

When is PED perfectly inelastic?

Answer 12

When the LED value is 0

Question 13

When is demand price elastic?

Answer 13

When a change in price causes a proportionally larger change in demand

Question 14

When is demand price inelastic?

Answer 14

When a change in price causes a proportionally smaller change in demand

Question 15

What are the determinants of price elasticity of demand?

Answer 15

• Proportion of income spent on the product
• Addictiveness
• Necessity
• Number of substitutes
• Time

Question 16

What effect does the proportion of income spent on the product have?

Answer 16

• The greater the proportion of income spent on a product the less able consumers will be able to afford any price increases.
• Therefore, the greater the proportion of income spent on a product the more price elastic demand will be

Question 17

What effect does addictiveness have?

Answer 17

• The more addictive a product is, the more price inelastic demand will be
• People will carry on buying it regardless of a change in price

Question 18

What effect does necessity have?

Answer 18

If a product is considered a necessity, demand is likely to be price inelastic as people require the product no matter what the price is

Question 19

What effect does the number of substitutes have

Answer 19

• The more substitutes a product has, the more options are available for people to switch to if there is a change in price and there will therefore be more consumer switching
• The more substitutes a product has the more elastic demand must be

Question 20

What effect does time have?

Answer 20

Time gives consumers the opportunity to find alternatives. Therefore the greater the time period, the more price elastic demand will be

Question 21

What is the price elasticity of supply?

Answer 21

PES measures the responsiveness of supply given a change in price

Question 22

What is the equation for price elasticity of supply?

Answer 22

Percentage change in quantity supplied / percentage change in price

Question 23

When is supply price elastic?

Answer 23

When a change in price causes a proportionally larger change in supply

Question 24

When is supply price inelastic?

Answer 24

When a change in price causes a proportionally smaller change in supply

Question 25

When is PES elastic?

Answer 25

When the value is greater than 1

Question 26

When is PES inelastic?

Answer 26

When the PES value is between 0 and 1

Question 27

When is PES unitary elastic?

Answer 27

When the PES value is 1

Question 28

When is PES perfectly elastic?

Answer 28

When PES value is infinity

Question 29

When is PES perfectly inelastic?

Answer 29

When the PES value is 0

Question 30

What are the determinants of price elasticity of supply?

Answer 30

• Time required to produce the product
• Level of spare capacity
• Number of stock available
• Time
• Perishability of the product

Question 31

What effect does the time required to produce the product have

Answer 31

• The greater the amount of time needed to produce the product the more price inelastic supply will be.
• Products with a shorter production time tend to be more price elastic.
  -If the product can be produced quickly, firms will be able to respond to changes in price rapidly and vice versa

Question 32

What effect does the level of spare capacity have?

Answer 32

• The greater the spare capacity is in an industry the more price elastic supply will be.
• This is because there will be factors of production available to be used in production.
• Therefore, if there was a price rise the industry/firm would likely to be able to respond quickly by increasing production.

Question 33

What effect does the number of stock available have?

Answer 33

• The more finished goods available the more price elastic supply will be.
• This is because firms will be able to respond to a price rise by releasing some/all of these stocks on to the market straight away.

Question 34

What effect does the perishability of the product have?

Answer 34

• The more perishable a product is the harder it is to build up stocks of it.
• Therefore, the more price inelastic in supply the product will be