1.2.3

Question 1

What is price elasticity of demand?

Answer 1

Measures the responsiveness of quantity demanded after a change in the good’s own price.

Question 2

What is the formula for calculating the co-efficient of price elasticity of demand?

Answer 2

Percentage change in quantity demanded/ percentage change in price

Question 3

What is unitary elastic PED?

Answer 3

Where PED =1
quantity demanded changes by exactly the same percentage as price.

Question 4

What is relatively elastic PED?

Answer 4

PED>1
Quantity demanded changes by a larger percentage than the price so demand is relatively responsive to price.

Question 5

What is relatively inelastic PED?

Answer 5

PED<1
Quantity demanded changes by a smaller percentage than price so demand is relatively unresponsive to price.

Question 6

What is perfectly elastic PED?

Answer 6

PED=Infinity
A change in price means that quantity falls to 0 and demand is very responsive to price.

Question 7

What is perfectly inelastic PED?

Answer 7

PED=0
A change in price has no effect on output so demand is completely unresponsive to price.

Question 8

What are factors influencing PED?

Answer 8

-Number of substitutes
-Cost of switching between products
-Degree of necessity
-Proportion of a consumer’s income
-Time period allowed following a price change
-Habitual consumption
-Peak and off-peak demand
-Breadth of definition
-Method of payment

Question 9

How does the number of close substitutes affect PED?

Answer 9

The more substitutes there are in the market, the more elastic demand is as consumers find it easy to switch.

Question 10

How does the cost of switching between products affect PED?

Answer 10

There may be costs involved in switching, demand tends to be inelastic.
Phone contracts

Question 11

How does the degree of necessity affect PED?

Answer 11

Necessities have an inelastic demand whereas luxury goods have a more elastic demand

Question 12

How does the proportion of a consumers income affect PED?

Answer 12

Products that take up a high % of income will have a more elastic demand

Question 13

How does the time period allowed following a price change affect PED?

Answer 13

Demand is more price elastic, the longer that consumers have to respond to a price change.

Question 14

How does habitual consumption affect PED?

Answer 14

Consumers become less sensitive to price of the good when they buy something out of habit.

Question 15

How does peak and off-peak demand affect PED?

Answer 15

Demand in price inelastic at peak times and more elastic at off-peak times.

Question 16

How does the breadth of definition of a good or service affect PED?

Answer 16

If a good is broadly defined (demand for petrol/meat) demand is often inelastic.
individual brands of petrol/meat are likely to be price elastic.

Question 17

How does method of payment affect PED?

Answer 17

People tend to notice price changes more when they pay in cash rather than card.

Question 18

What is the equation for total revenue?

Answer 18

Price x quantity bought

Question 19

What is the relationship between demand which is price inelastic and total revenue?

Answer 19

When demand is price inelastic, a rise leads to a rise in total revenue.

Question 20

What is the relationships between when demand in price elastic and total revenue?

Answer 20

When demand is price elastic, a fall in price leads to a rise in total revenue

Question 21

What is the relationship between demand which is perfectly inelastic and total revenue?

Answer 21

When demand is perfectly inelastic, a given price change will result in the same revenue

Question 22

What in the relationship between when demand is unit elastic and total revenue?

Answer 22

When demand is unit elastic, a change in price leads to no change at all in the revenue.

Question 23

What is cross elasticity of demand (XED)?

Answer 23

Measures the percentage change in quantity demand for a good after a change in the price of another.

Question 24

What is surge pricing?

Answer 24

An algorithmically fuelled technique that firms use when there is a demand-supply imbalance.

Question 25

What businesses use dynamic pricing?

Answer 25

Ebay
Aribnb
American airlines

Question 26

What are the limitations of PED?

Answer 26

-Problems with inaccurate/incomplete data collection.
-Consumer price sensitivity changes.
-Elasticity of demand varies by region/time.
-Not all businesses are profit maximisers.
-Rival producers will change their market strategies over time.

Question 27

What is income elasticity of demand(YED)?

Answer 27

Measures the responsiveness of demand following a change in real income.

Question 28

What is the formula for calculating income elasticity of demand?

Answer 28

Percentage change in quantity demanded / percentage change in income

Question 29

What is a luxury good?

Answer 29

A good which is non essential, and is responsive to change in income.

Question 30

What is the impact of an increase in income for luxury goods?

Answer 30

Large increase in demand.

Question 31

What is a normal good?

Answer 31

A good which is essential and is quite responsive to a change in income.

Question 32

What impact does an increase in income have on a normal good?

Answer 32

Increase in demand

Question 33

What is an inferior good?

Answer 33

A good which has an inverse relationship with income.

Question 34

What impact does an increase in income have on an inferior good?

Answer 34

Demand falls.

Question 35

What types of YED do normal goods have?

Answer 35

Positive income elasticity of demand.
Consumers income rises, more is demanded

Question 36

What type of YED do luxury goods have?

Answer 36

Income elasticity of demand > +1

Question 37

What type of YED do inferior goods have?

Answer 37

Negative income elasticity of demand.
Demand falls as income rises.

Question 38

What is the equation for cross elasticity of demand?

Answer 38

Percentage change in quantity demanded Good A / Percentage change in price Good B