1.3: Elasticity, PED, XED, YED, PES

Question 1

Elasticity

Answer 1

Is a measure of how sensitive Quantity Demanded is to a change in price

Question 2

Elastic

Answer 2

Is the percentage change of quantity demanded being higher than the percentage change in price. Is a slanted line horizontally.

Question 3

Inelastic

Answer 3

Is the percentage change in quantity being lower than the percentage change in price. A slanted line vertically.

Question 4

Perfectly Elastic

Answer 4

Quantity demanded changes but price doesn’t change. Has a PED value of infinity. Is a perfectly horizontal line with no gradient.

Question 5

Unitary

Answer 5

When percentage change in quantity is the same as percentage change in price.

Question 6

Price Elasticity of Demand (PED)

Answer 6

Measures the responsiveness of quantity demanded in a change in its own price.

In formula it is written as:
% Change in QD / % Change in price

Question 7

Determinants of PED

Answer 7

1) Subsitutes:
Goods with plenty close subsitutes have PED>1 as consumers has many alternatives to choose from. Not many subsitutes, limited choice hence PED>1.

2) Neccesity or Luxury:
Neccesities have low PED as they are essential to everyday life. However, Luxury goods are expendable and can be switched easily for cheaper options hence they have high PED.

3) Addictive or Habbit Forming:
Withdrawal effects on items like cigarettes make it hard to forgo, hence consumers are willing to pay the increase in Price. Hence PED is low.

4) Expenditure onto income:
If it takes a large percent of income, it tends to be elastic as consumers are financially rational. However, if it takes a small percent of income, it’s PED is inelastic as its feasible.

Question 8

Total Revenue

Answer 8

Calculated as Price times Quantity (P x Q)

Question 9

Cross Elasticity of Demand

Answer 9

Measures the responsiveness of Quantity Demanded to a change in the price of another good ( Subsitute or Complements )

In formula it is written as:

XED: % Change QD of Good A / % Change of Another Good or Good B

Question 10

Subsitutes

Answer 10

Goods that can be used in the place of one another, they have “competing demand”. They have positive (+) values.

Extra:
The higher the XED, the greater the two are as substitutes. Eg Tea and Coffee, Milo and Chocolate Milk

Relationship (Summary): Subsitutes
Tea & Coffee,
P Tea increases, Q tea decreases, Q Coffee Increases

Question 11

Complements

Answer 11

Goods that are consumed together, they are “Jointly Demanded”. They have a negative (-) XED value.

Extra:
For example if the price for printer has decreased, the Quantity Demanded for ink will increase. Due to the law of demand, P decrease, Q increase for printer and as ink incartidges are consumed together, the purchases of it will increase.

Summary:
P Football decreases, Q Football increases, Football Boots increases.

Question 12

Income Elasticity of Demand (YED)

Answer 12

Measures the responsiveness of quantity demanded for a good to a change in income

Calculated as :
% Change of Quantity Demanded / % Change in Income

Normally to identify whether inferior or normal/luxury good

Question 13

Normal Good

Answer 13

A normal good has a positive (+) YED, as income increases so does QD. The value is between 0 and 1, normally necessities fall under this category.

Question 14

Luxury Good

Answer 14

Has a YED>1, as it unecessary and QD reacts sensitively to an increase in price.

Question 15

Inferior Good

Answer 15

Has a negative (-) YED, as Y increases, QD will decrease. Normally instant noodles, frozen food, baked beans, bus service fall unde this. With an increase in income, they are seen as inferior and people purchase better things to increase SOL.

Question 16

Price Elasticity of Supply (PES)

Answer 16

Measures the responsiveness of quantity supplied for a good to a change in its own price.

In formula, it is calculated as:
% Change of QS / % Change in Price

Question 17

Determinants of PES:

What affects or limit the supply to be able to react to a change in price

Answer 17

1) Time Period:
In the short run, PES is slow as firms need time to react and adjust its FOP to take advantage of the increase in price. E.g, firms cannot increase the size of land overnight, nor find and train workers in time to take advantage of increase in price. In LR it might.

2) Mobility of FOPs:
If capital and labour are occupationally mobile to produce that certain good, they are able to react to market prices by shifting the production. This means they are Price Elastic in Supply or PES>1. The greater the mobility, the more elastic.

3) Spare Capacity:
If a firm has spare capacity, they have the ability to increase output as labour and capital are underutilised. Able to react to a change in price hence PES>1. If PES<1, this indicates that they operating at bottleneck and cannot produce furthemore. Unable to react positively to a change in price.

4) Agricultural or Manufactured goods:
Farmers have low PES as it takes time to naturally produce crops. They can’t instigate growth nor have changes in weather in their favour, to react timely in changes in price. Firms can simply increase output by increasing inputs like capital and labour to react to it, hence it is normally Price Elastic to Supply (PES>1).