2) What Factors determine Elasticity? - MMT

Question 1

what’s the strongest determinant of a products PED?

Answer 1

its degree of substitutability

Question 2

PED:
if there are lots of close substitutes available then demand for a product will tend to be highly price…

Answer 2

elastic

Question 3

PED:
if there aren’t lots of close substitutes available then demand may well be price…

Answer 3

inelastic

Question 4

PED:
luxury goods: elastic or inelastic?

Answer 4

elastic

Question 5

PED:
necessity : elastic or inelastic?

Answer 5

inelastic

Question 6

PED:
habit forming products (eg cigarettes) : elastic or inelastic?

Answer 6

tending to be price inelastic ( so taxed heavily by governments)

Question 7

PED:
branded goods : elastic or inelastic?

Answer 7

more price inelastic eg Heinz baked beans

Question 8

PED:
Time: elastic or inelastic?

Answer 8

over time, services like electricity, phone contracts become more price elastic as in the short- term customers may be tied to a contract

Question 9

PED:
why is substitutability key?

Answer 9

the factors (luxury, necessities, habit forming products, branded goods, time) are underpinned by the availability or lack of substitutes

Question 10

PES:
what is the biggest single factor determining PES

Answer 10

time

Question 11

PES:
in the long term, almost all goods and services become…

Answer 11

elastic in supply

Question 12

PES:
why is it that in the short term, supply can often be highly price inelastic?

Answer 12

this is because it often takes considerable time to adjust supply
eg plant different crops, change production processes etc

Question 13

PES:
in the short term, supply can often be highly price…

Answer 13

inelastic

Question 14

PED:
other than substitutability what are other influences on PED? (list 4 factors, could argue that they are underpinned by the availability or lack of substitutes)

Answer 14

1) luxury or necessity
2) habit forming products
3) branded goods
4) time

Question 15

PES:
other than time, what are other factors that influence PES? (list 3 factors, could argue time underpins all of these factors)

Answer 15

1) mobility of the factors of production
2) availability of storage facilities
3) nature of the goods

Question 16

PES:
what is an example of mobility of the factors of production?

Answer 16

eg how easily can workers be upskilled

Question 17

PES:
how could the availability of storage facilities cause supply to be more price elastic?

Answer 17

if firms can keep large stocks in the reserve the supply might be more price elastic

Question 18

PES:
nature of the goods:
give an example using short-term, long term, inelastic, elastic

Answer 18

many natural products are highly inelastic in the short term; businesses must wait for nature to run its course; however some products (eg hand sanitiser/PPE in the pandemic) were easier to transfer resources to, therefore more price elastic in supply

Question 19

YED:
what does income elasticity depend on?

Answer 19

purely determined by the nature of the good

Question 20

YED:
what are 3 examples of types of goods?

Answer 20

1) luxury goods
2) Necessities
3) very basic items/services

Question 21

YED:
are luxury goods income elastic/inelastic?

Answer 21

income elastic

Question 22

YED:
why are luxury goods considered to be income elastic?

Answer 22

this is because it is our decision to buy or not buy these goods in heavily influenced by the amount of spare RDI that consumers have at the time

Question 23

YED:
are necessities income elastic/inelastic?

Answer 23

usually income inelastic

Question 24

YED:
why are necessities usually income inelastic?

Answer 24

basic items like milk and bread are normally amongst the last things that consumers give up if RDI falls, if RDI increases, our extra demand for these items is low

Question 25

YED:
what type of good are basic items/services?

Answer 25

inferior goods

Question 26

YED:
why are basic items/services inferior goods?

Answer 26

when RDI increases we buy less of these and switch to more luxurious products; if RDI falls we buy more of these products

Question 27

XED:
what does Cross Elasticity between 2 goods depend on?

Answer 27

depends totally on the relationships between the goods (substitutes or complements)

Question 28

XED:
If the goods are substitutes there is a…(positive/negative) correlation between the goods and XED will be a.. (+/-)

Answer 28

• positive correlation
  -> +

Question 29

XED:
what does it mean if a good is positive and has a high XED?
what does it mean if a good is positive and has a low XED?

Answer 29

• high and positive : the more substitutable the goods the higher the XED
• low and positive: distant substitutes will be a + but a low XED ( eg 0.2)

Question 30

XED:
If the goods are complements there is a…(positive/negative) correlation between the goods and XED will be a.. (+/-)

Answer 30

• negative correlation
  -> minus -

Question 31

XED:
what does it mean if a good is negative and has a high XED?
what does it mean if a good is negative and has a low XED?

Answer 31

• close complements (eg frozen chips and cooking oil/ bread and butter) will have a high XED

Question 32

XED:
are complementary relationships often quite elastic or inelastic? why?

Answer 32

quite inelastic, eg an increase in the price of new cars might not have a huge effect on current demand for petrol