1.2 elasticities

Question 1

what is the definition of price elasticity of demand?

Answer 1

the sensitivity of demand to changes
in price

Question 2

give the formula for PED

Answer 2

%∆𝑄𝑑 ÷ %∆𝑃

Question 3

what is meant by ‘price elastic demand’?

Answer 3

demand is very sensitive to price - the % change in demand will be bigger than the % change in price

Question 4

what values would constitute ‘price elastic demand’?

Answer 4

1 to ∞

Question 5

what is meant by ‘perfectly price elastic demand’?

Answer 5

if we increase price by even 1%, we
lose all demand

Question 6

what values would constitute ‘perfectly elastic demand’?

Answer 6

∞

Question 7

what is meant by ‘price inelastic demand’?

Answer 7

demand is not very sensitive to price - the % change in demand will be smaller than the % change in price

Question 8

what values would constitute ‘price inelastic demand’?

Answer 8

0 to 1

Question 9

what is meant by ‘unit elastic demand’?

Answer 9

the % change in demand will be the same as the % change in price

Question 10

what value would constitute ‘unit elastic demand’?

Answer 10

1

Question 11

give the factors which influence the PED of a product

Answer 11

number of substitutes
proportion of income (%)
degree of luxury/necessity
addictiveness
time period

Question 12

what is the definition of cross price elasticity of demand?

Answer 12

the sensitivity of demand of good A to a change in the price of good B

Question 13

give the formula for XED

Answer 13

%∆𝑄d of Good A ÷ %∆𝑃 of Good B

Question 14

what is the definition of substitute goods?

Answer 14

goods which can be used in place of one another

Question 15

what values of XED would constitute a substitute?

Answer 15

positive
+

Question 16

what is the definition of complementary goods?

Answer 16

goods that are used together

Question 17

what values of XED would constitute complementary goods?

Answer 17

negative

Question 18

what would an XED of 0 indicate?

Answer 18

unrelated goods

Question 19

what is the definition of income elasticity of demand?

Answer 19

the sensitivity of demand to changes in income

Question 20

give the formula for YED

Answer 20

%∆𝑄𝑑 ÷ %∆𝑌

Question 21

what is the definition of an inferior good?

Answer 21

where demand increases when incomes fall

Question 22

what values of YED would constitute an inferior good?

Answer 22

negative

Question 23

what is a normal good?

Answer 23

when demand increases when incomes rise

Question 24

what values of YED would constitute a normal good?

Answer 24

positive
+

Question 25

what is the definition of a luxury good?

Answer 25

a type of normal good demand is very sensitive to changes in income - the % change in demand will be larger than the % change in income

Question 26

what values of YED would constitute a luxury good?

Answer 26

>1

Question 27

what is another term for a luxury good?

Answer 27

normal income elastic

Question 28

what is the term for a normal good which is not a luxury good?

Answer 28

necessity

Question 29

why do firms need to know the price elasticity of demand for their products?

Answer 29

so they can predict the impact of a price change on demand/revenue

Question 30

under what circumstances would an increase in price increase the revenue gained from a product?

Answer 30

PED inelastic

Question 31

under what circumstances would an increase in price decrease the revenue gained from a product?

Answer 31

PED elastic

Question 32

under what circumstances would an increase in price leave revenue unchanged?

Answer 32

PED unit elastic

Question 33

why do firms need to know the cross price elasticity of demand for their products?

Answer 33

to predict revenue change of one good when the price of another good changes

Question 34

why do firms need to know the income price elasticity of demand for their products?

Answer 34

to predict revenue change of one good when incomes change

Question 35

under what circumstances would a recession increase the sales of product?

Answer 35

inferior good

Question 36

what is the definition of price elasticity of supply?

Answer 36

the sensitivity of supply to changes in price

Question 37

give the formula for PES

Answer 37

%∆𝑄s ÷ %∆P

Question 38

what is meant by ‘price elastic supply’?

Answer 38

supply is very sensitive to price - the % change in supply will be bigger than the % change in price

Question 39

what values would constitute ‘price elastic supply’?

Answer 39

1 to ∞

Question 40

what is meant by ‘perfectly price elastic supply’?

Answer 40

where supply is infinite at a certain price

Question 41

what values would constitute ‘perfectly elastic supply’?

Answer 41

∞

Question 42

what is meant by ‘price inelastic supply’?

Answer 42

supply is not very sensitive to price - the % change in supply will be smaller than the % change in price

Question 43

what values would constitute ‘price inelastic supply’?

Answer 43

0 to 1

Question 44

give the factors which influence the PES of a product

Answer 44

time capacity storability

Question 45

what is meant by ‘perfectly price inelastic demand’?

Answer 45

only one quantity can be supplied, regardless of the price

Question 46

what values would constitute ‘perfectly inelastic demand’?

Answer 46

0

Question 47

what is the economic definition of the long run?

Answer 47

the period of time in which at least one factor of production is fixed

Question 48

why is PES more elastic in the long run?

Answer 48

because firms have time to increase capacity

Question 49

give the reasons why consumers may not act rationally

Answer 49

influence of other people habitual behaviour consumer weakness at consumption

Question 50

explain how the influence of other people affects rationality

Answer 50

- sometimes individuals are influenced by social norms, known as a bias - for example, someone buying something to 'fit in' or because everyone else has it, and so they are expected to too - consumers become unwilling to change the bias, even if doing so will benefit them - 'herding behaviour' occurs when an individual copies the actions of a large group e.g. the stock market

Question 51

explain how habitual behaviour affects rationality

Answer 51

- habits reduce the amount of time it takes to do something because consumers no longer have to consiously think about their ations - habits create a barrier to decision making since they limit or prevent consumers considering an alternative - e.g. addictions willmake consumers buy more drugs/alcohol even though they know they should give up - e.g consumers tend to buy products at eye level in the supermarket so higher priced products tend to be placed higher than lower priced products

Question 52

explain how consumer weakness at consumption affects rationality

Answer 52

- some consumers aren't willing or able to make price comparisons so they will by the unnessesary expensive good - e.g. buying multipack because they believe it's cheaper when it's not in reality - consumers are also poor at self-control and so they do things they know they shouldn't - they will also make decisions without looking at the long term effect