1.2.3 & 1.2.5 - Elasticities

Question 1

Def PED

Answer 1

measures the responsiveness of quantity demanded given a change in price

Question 2

equation for PED

Answer 2

PED = %change in Qd/%change in P

Question 3

Interpret numerical values of PED: unitary elastic, perfectly and relatively elastic, and perfectly and relatively inelastic

Answer 3

(>1) = PED elastic

(<1) = PED inelastic

0 = D perfectly P inelastic

∞ = D perfectly P elastic

1 = D is unit P elastic

PED value is always negative - law of demand

Question 4

The factors influencing PED

Answer 4

• Substitutes
• Percentage of income
• Luxury/necessity
• Addictive/habit forming
• Time period - S-R P inelastic (less substitutes, not enough time to get something else)

SPLAT

Question 5

def YED

Answer 5

YED measures the responsiveness of quantity demanded given a change in income

Question 6

equation for YED

Answer 6

YED = %change Qd / %change Y

Question 7

Interpret numerical values of YED: inferior, normal and luxury goods; relatively elastic and relatively inelastic

Answer 7

+) = normal good (positive figure)
-) = inferior good (negative figure)

0 = YED is perfectly inelastic

Normal good:
(>1) YED elastic (normal luxury)
(<1) YED inelastic (normal necessity)

Inferior good:
(>1) YED elastic
(<1) YED inelastic

Question 8

def XED

Answer 8

XED measures the responsiveness of quantity demanded of a good/service given a change in price of another

Question 9

equation for XED

Answer 9

XED = %change Qd(of good a) / %change P (of good b)

Question 10

Interpret numerical values of XED: substitutes,
complementary and unrelated goods

Answer 10

+) = substitute (positive figure)

-) = complements (negative figure)

(>1) XED is elastic (strongly related comp or subs)

(<1) XED is inelastic (weakly related comp or subs)

0 XED is perfectly inelastic (no relationship)

Question 11

The relationship between price elasticity of demand and
total revenue (including calculation)

Answer 11

total expenditure = quantity purchased x price
total revenue = quantity sold x price

• if PED is inelastic then expenditure will rise when prices rise
• if PED is elastic then then expenditure will fall when prices rise
• if PED is =0 (unity) the expenditure will remain unchanged

Question 12

def PES

Answer 12

PES measures the responsiveness of quantity supplied given a change in price

Question 13

equation for PES

Answer 13

PES = %change Qs / %change P

Question 14

Interpret numerical values of PES:
perfectly and relatively elastic, and perfectly and
relatively inelastic

Answer 14

(>1) = PES elastic
(<1) = PES inelatic
0 = PES is perfectly inelatic
∞ = PES is perfectly elastic
1 = supply is unit price elastic

PES value always negative - law of supply

Question 15

Factors that influence PES and the distinction between short run and long run in economics and its significance for PES

Answer 15

• Production lag - longer lag = PES more inelastic
• Stock - more stock = PES more elastic
• Spare capacity - increased capacity = PES more elastic
• Substitutability - more substitutable FoP = PES more elastic
• Time - in the short run there is at least 1 fixed FoP (normally land/capital) = in short run its difficult to increase production = PES inelastic (cant vary FoP). in L-R all FoP are variable = PES elastic