2.2

Question 1

Elasticity

Answer 1

• how much one variable changes in response to changes in another
• if change in

Question 2

Price elasticity of demand

Answer 2

• extent to which demand changes in response to change in price
• %change in D / %change in P
• for normal & luxury goods this will always be negative

Question 3

Measuring elasticity

Answer 3

• > 1 = elastic = P changes leads to bigger change in D
• <1 = inelastic = P changes leads to smaller change in D

Question 4

Influences on elasticity

Answer 4

• Availibility of substitutes:More=more elastic
• Percentage of income: More=more elastic
• Necessities v. luxuries: N=elastic, L=inelastic
• Width of definition: wider=lower elasticity
• Time: more=more elastic

Question 5

How does elasticity of demand affects the Gov’s taxation policy?

Answer 5

Governments often rely on taxes to generate revenue. Elasticity of demand helps in determining the tax incidence on consumers and producers. If the demand for a good is elastic, consumers bear a higher burden of the tax as they are more responsive to price changes. Conversely, if demand is inelastic, producers may bear more of the tax burden.

Question 6

How does elasticity of demand affects the Gov’s price regulation?

Answer 6

Governments may intervene to regulate prices, especially in markets for essential goods and services. Elasticity helps in predicting the impact of price controls. For example, if the demand for a basic necessity is inelastic, price controls may be more effective in protecting consumers from excessive price increases.

Question 7

How does elasticity of demand affects the Gov’s subsidy allocation?

Answer 7

Understanding elasticity is essential when implementing subsidies. For goods with elastic demand, subsidies can have a more significant impact on increasing quantity demanded. In contrast, subsidies for goods with inelastic demand may not result in a proportionate increase in quantity.

Question 8

How is the concept of elasticity of demand used by trade unions

Answer 8

used by trade union leaders in collective bargaining. For instance, the trade union leaders can bargain for higher wages if they know that the demand for their labour is inelastic.

Question 9

Elasticity of demand for commodities with lots of different uses. Composite demand.

Answer 9

A commodity that can be used for different purposes (such as milk) will have an elastic demand. This is because if the price of this commodity increases, it will be used only for important purposes leading to a drastic fall in demand.