1.2 Elasticities

Question 1

PED

Answer 1

Is a measure of the responsiveness of the quantity demanded for a good or service to a change in its price

Question 2

Inelastic Demand

Answer 2

Is where a change in price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service.
(PED is between 0 and 1)

Question 3

Elastic demand

Answer 3

Is where a change in price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service.
(PED is greater than 1)

Question 4

XED

Answer 4

is the responsiveness of good x’s demand after a change in good y’s price.

Question 5

Substitues goods

Answer 5

are goods that can be used against each other, such as sugar or honey. Substitute goods have a positive XED.

Question 6

Complementary goods

Answer 6

Are goods which are can be used together. Complementary goods have a negative XED.

Question 7

YED

Answer 7

is a measure of responsiveness of demand for a good or service to a change in income.

Question 8

Normal goods

Answer 8

have a positive YED. As income rises, the demand for the good increases

Question 9

Inferior goods

Answer 9

have a negative YED. As income rises, the demand for the good decreases.

Question 10

PES

Answer 10

is a measure of the responsiveness of the quantity supplied for a good or service to a change in its price.

Question 11

Inelastic supply

Answer 11

Is where a change in price of a good or service leads to a proportionately smaller change in the quantity supplied of the good or service.
(PES is between 0 and 1)

Question 12

Elastic Supply

Answer 12

Is where a change in price of a good or service leads to a proportionately larger change in the quantity supplied of the good or service.
(PED is greater than 1)

Question 13

If PED=0

Answer 13

When there is a change in price, there is no effect on quantity demanded. So PED is perfectly inelastic

Question 14

If PED=infinity

Answer 14

When there is a change in price, demand will fall to 0.

Question 15

What happens to the demand for commodities

Answer 15

It tends to be inelastic, since they are scarce resources.

Question 16

What happens to the demand for manufactured goods

Answer 16

It tends to be elastic, due to the variety of choice presented to customers.

Question 17

Unit elastic demand

Answer 17

Happens when PED=1
Changes in price, cause a proportionate opposite change in quantity demanded. So total revenue gained by the firm remains the same when price increases.

Question 18

what are the determinants of PED?

Answer 18

1. Availability of substitutes: The more substitutes available, then the more elastic the demand.
2. The necessity o the product and how widely the product is defined:
   Food is necessary, and would therefore be inelastic
3. Time period: Products tend to be inelastic in the short term, but elastic in the long term- it can take time to respond to changes and find alternatives
4. The proportion of income spent on a good: (the higher the proportion of income spent on a good, the more elastic the product- consumers will be forced to buy less as price increases)

Question 19

what are the determinants of PES?

Answer 19

1. How much costs rise as output is increased:
   Rise in total costs, producers don’t increase supply (PES is inelastic).
2. Time period:
   Products tend to be inelastic in the short term, but elastic in the long term- it can take time to respond to changes and find alternatives
3. Ability to store stocks:
   High levels of stock, firms tend to react quickly to price changes (PES is elastic)