1.2.3, 1.2.5 Elasticities

Question 1

What does the price elasticity of demand (PED) measure?

Answer 1

PED measures the responsiveness of demand to a change in price

Question 2

PED formula

Answer 2

PED = % change in QD / % change in P

Question 3

What are the determinants of PED? (5)

Answer 3

• degree of necessity
• proportion of income
• substitutes/competitors
• time
• habits

Question 4

If PED < -1

Answer 4

PED is price elastic (shallow gradient)

Question 5

What does it mean when PED is price elastic?

Answer 5

A change in price results in a proportionately larger change in demand (e.g. any good in a competitive market)

Question 6

If -1 < PED < 0

Answer 6

PED is price inelastic (steeper gradient)

Question 7

What does it mean when PED is price inelastic?

Answer 7

A change in price results in a proportionately smaller change in demand (e.g. unique goods, necessities)

Question 8

If PED/PES = ∞

Answer 8

PED/PES is perfectly elastic (horizontal curve)

Question 9

What does it mean when PED/PES is perfectly elastic?

Answer 9

A change in price results in no demand/supply

Question 10

If PED/PES = 0

Answer 10

PED/PES is perfectly inelastic (vertical curve)

Question 11

What does it mean when PED/PES is perfectly inelastic?

Answer 11

A change in price results in no change in quantity demanded/supplied

Question 12

If PED = -1

Answer 12

PED is unitary elastic

Question 13

What does it mean when PED is unitary elastic?

Answer 13

A change in price is equal to the change in quantity demanded

Question 14

What does the price elasticity of supply (PES) measure?

Answer 14

PES measures the responsiveness of supply to a change in price

Question 15

PES formula

Answer 15

PES = % change in QS / % change in P

Question 16

What are the determinants of PES? (5)

Answer 16

• number of firms in the market
• length/difficulty of production
• amount of spare capacity
• perishability
• weather

Question 17

If PES > 1

Answer 17

PES is price elastic (shallow gradient)

Question 18

What does it mean when PES is price elastic?

Answer 18

A change in price results in a proportionately larger change in quantity supplied

Question 19

If 0 < PES < 1

Answer 19

PES is price inelastic (steeper gradient)

Question 20

What does it mean when PES is price inelastic?

Answer 20

Supply is not as responsive, meaning that a change in price results in a proportionately smaller change in supply

Question 21

If PES = 1

Answer 21

PES is unitary elastic

Question 22

What does it mean when PES is unitary elastic?

Answer 22

A change in price is equal to the change in quantity supplied

Question 23

What does the income elasticity of demand (YED) measure?

Answer 23

YED measures the responsiveness of demand to a change in income

Question 24

YED formula

Answer 24

YED = % change in QD / % change in Y

Question 25

If YED = positive

Answer 25

The good is a NORMAL GOOD

Question 26

What is a normal good?

Answer 26

Goods that increase in demand when income level rises (positively related) [vice versa]

Question 27

If YED = negative

Answer 27

The good is an INFERIOR GOOD

Question 28

What is an inferior good?

Answer 28

Goods that experience increased demand when income level falls (inversely related) [vice versa]

Question 29

If -1 < YED < 1

Answer 29

The good is a NECESSITY (YED is inelastic)

Question 30

What is a necessity?

Answer 30

Basic goods that consumers need regardless of income level (e.g. water, clothing, food, shelter)

Question 31

If YED < -1, YED > 1

Answer 31

The good is a LUXURY GOOD (YED is elastic)

Question 32

What is a luxury good?

Answer 32

Goods that consumers buy if they are willing and able afford them, desirable goods (e.g. jewellery)

Question 33

What does the cross price elasticity of demand (XED) measure?

Answer 33

XED measures the responsiveness of demand for good A to a change in price for good B (how the price of one good affects the demand for another)

Question 34

XED formula

Answer 34

XED = % change in QDa / % change in Pb

Question 35

XED for substitute goods

Answer 35

Always positive (upwards sloping curve)

Question 36

XED for complementary goods

Answer 36

Always negative (downwards sloping curve)

Question 37

If XED > 1

Answer 37

The two goods are strong substitutes (elastic: change in Pb results in a larger change in QDa)

Question 38

If 0 < XED < 1

Answer 38

The two goods are weak substitutes (inelastic: change in Pb results in a smaller change in QDa)

Question 39

If XED < -1

Answer 39

The two goods are strong complements (elastic: change in Pb results in a larger change in QDa)

Question 40

If -1 < XED < 0

Answer 40

The two goods are weak complements (inelastic: change in Pb results in a smaller change in QDa)