2.5-2.6 PED, YED, PES

Question 1

elasticity

Answer 1

responsiveness of one variable to a change in another variable

Question 2

price elasticity of demand (PED)

Answer 2

• measure of how much the quantity demanded of a good changes when there is change in price
• (percent change in quantity demanded) / (percent change in price), always positive value

Question 3

inelastic goods

Answer 3

insensitive to changes in price

• few close substitutes
• high degree of necessity
• small portion of income
• addictive
• required now than later (time sensitive)
• PED < 1

Question 4

elastic goods

Answer 4

sensitive to changes in price
- many substitutes
- luxury good
- large portion of income
- non-addictive
- not urgent, plenty of time to decide
- PED > 1

Question 5

SPLAT

Answer 5

• S: substitutes
• P: percentage of income
• L: luxury or necessity
• A: addiction
• T: time

Question 6

perfectly elastic demand

Answer 6

• PED = inf
• horizontal straight line graph

Question 7

relatively elastic demand

Answer 7

• PED > 1
• flatter (lower slope) straight line graph

Question 8

unitary elastic demand

Answer 8

• PED = 1
• curvy line graph OR middle point in slope=1 straight line graph

Question 9

relatively inelastic demand

Answer 9

• PED < 1
• higher slope straight line graph

Question 10

perfectly inelastic demand

Answer 10

• PED = 0
• vertical straight line graph

Question 11

total revenue

Answer 11

price x quantity

Question 12

elasticity effect on total revenue [elastic]

Answer 12

• increase in price -> decrease in TR
• decrease in price -> increase in TR

Question 13

elasticity effect on total revenue [inelastic]

Answer 13

• increase in price -> increase in TR
• decrease in price -> decrease in TR

Question 14

elasticity effect on total revenue [unitary]

Answer 14

• increase/decrease in price -> no change in TR

Question 15

PED change in slope=1 demand curve

Answer 15

• left (highest) to middle point: PED > 1, elastic
• middle point: PED=1, unitary
• middle point to right (lowest): PED < 1, inelastic

Question 16

TR change in slope=1 demand curve

Answer 16

opening down parabola with its maximum point at point with PED=1 value

Question 17

consumer surplus

Answer 17

• difference between highest price consumers are willing and able to pay and the actual price they pay
• left&high triangle at supply and demand graph

Question 18

producer surplus

Answer 18

• difference between the lowest price producers are willing and able to offer the good and the actual price they received for it
• left&bottom triangle at supply and demand graph

Question 19

social/community surplus

Answer 19

• sum of consumer & producer surplus
• total benefit gained by society when market is at equilibrium

Question 20

taxes on goods with inelastic demand

Answer 20

• earn more revenue due to change in price changing Qd very little

Question 21

income elasticity of demand (YED)

Answer 21

measure of how much quantity demanded of a good will change in response to change inc onsumers’s incomes

Question 22

normal good

Answer 22

• yed > 0
• Qd increases as Y increases (shape similar to supply graph)

Question 23

inferior good

Answer 23

• yed <0
• Qd decreases as Y increases (shape similar to demand curve)

Question 24

income elastic demand (necessity good)

Answer 24

-1 < yed < 1
change in income -> proportionally smaller change in Qd

Question 25

income elastic demand (luxury good)

Answer 25

yed <-1 or yed >1
change in income -> proportionally bigger change in Qd

Question 26

perfectly income inelastic demand

Answer 26

yed=0
change in income -> no change in Qd
closer yed is to 0, greater the necessity

Question 27

YED = 1

Answer 27

proportional change
change in income -> proportionally equal change in Qd

Question 28

price elasticity of supply (PES)

Answer 28

a measure of how much the quantity supplied of a good changes when there is a change in its own price