2.5 elasticities of demand

Question 1

elasticity

Answer 1

the responsiveness of one variable to the change in another variable

Question 2

PED (def+calculation)

Answer 2

price elasticity of demand
the measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

%∆in qty demanded/%∆in price

Question 3

PED>1

Answer 3

price elastic demand
change in price leads to a greater than proportionate change in qty demanded

Question 4

0<PED<1

Answer 4

price inelastic demand
change in price results in a proportionately smaller change in demand

Question 5

PED=1

Answer 5

unitary elastic demand

change in price leads to a proportionately equal change in demand

(graph is a curve)

Question 6

PED=0

Answer 6

perfectly inelastic demand

change in price results in no change in qty demanded

Question 7

PED=∞

Answer 7

perfectly elastic demand
a change in price results in infinite change in qty demanded

Question 8

determinants of PED

Answer 8

number and closeness of substitutes
degree of necessity and how widely its defined
time period considered
proportion of income spent on the good

Question 9

how does no. & closeness of substitute goods affect PED?

Answer 9

substitution effect
price rise, relatively more expensive than than other goods, consumers switch to substitutes
closeness of substitutes - close substitutes - switch easily, remote - switch less easily

Question 10

how does degree of necessity & how widely a good or service is defined affct PED?

Answer 10

necessity = less responsive as have to consume regardless
necessity = a good or service tat qty demanded does not change much in response to a price change bc consumers consider it essential
e.g. drugs

widely defined = incl every product in category e.g. food = will not have many substitutes

Question 11

how does time period considered affect PED?

Answer 11

immediate term, consumer no time to react and look for alternatives, demand = inelastic

long term= got time to find substitutes = demand more elastic

Question 12

how does proportion of income spent on the good affect PED

Answer 12

disposable income= The income remaining after deduction of taxes and social security charges, available to be spent or saved as one wishes.

if low price=spend small proportion of income on good/service = small on qty demanded = inelastic

if high price = spend large proportion of income on good/service = larger impact on qty demanded = elastic

Question 13

total revenue

Answer 13

money earned by a firm from selling a good or service, the selling price multiplied by the total qty sold

pricexqty

Question 14

commodity

Answer 14

a primary good, and is an important input to production

e.g . oil, ore, timbre

Question 15

profits

Answer 15

money remaining from sales revenue after costs or production have been subtracted
Tprofit - T cost of production

Question 16

ped changes along linear demand curve

Answer 16

its hard to explain this w/o the diagram man idk

Question 17

tax incidence

Answer 17

percentage of an indirect tax paid for by consumers and producers respectively (burden on P or C)

Question 18

indirect tax

Answer 18

a tax imposed on a good or service, it typically paid to the govt. by the producers or supplied and is considered a cost of production

Question 19

implication of PED on indirect tax

Answer 19

if PED inelastic, consumers pay more as producers confident that they can raise price w/o losing too may sales

if elastic, consumers pay less tax as sales drop more when price increases
increase in price leads to large impact on demand thus producers more willing to absorb tax payment

Question 20

tax revenue calculation

Answer 20

Qt x (Pt-P1)

Question 21

subsidy

Answer 21

an amount of money granted by the govt to a firm or industry, reducing the firm’s COP, increasing the supply of the good or service. usually a per-unit payment by govt, t firms in order to lower production costs and increase production

Question 22

subsidy effect on demand when diff PED

Answer 22

inelastic = consumption increase little
elastic = great increase in consumption

Question 23

PED of commodities

Answer 23

inelastic

Question 24

manufactured goods

Answer 24

human-made goods that have been produced from raw materials transferred through a production process

Question 25

YED

Answer 25

income elasticity of demand a measure of how much qty demanded of a good or service changes in response to an income change %∆qty demanded/%∆income

Question 26

normal goods (def +YED)

Answer 26

goods whose demand increases as people’s incomes increase YED>0

Question 27

inferior goods (def+ YED)

Answer 27

goods whose demand decrease as people’s income increases YED<0

Question 28

-1

Answer 28

YED close to 0 income inelastic demand a change in income results in a less than proportionate change in demand not responsive to income change necessity goods

Question 29

necessity goods

Answer 29

good or service whose qty demanded does not change much in response to a price change bc consumers consider it essential

Question 30

YED>1 YED<-1

Answer 30

income elastic demand a change in income leads to a greater than proportionate change in qty demanded

Question 31

YED=0

Answer 31

perfectly income inelastic demand a change in income leads to no change in qty demanded

Question 32

YED>0

Answer 32

normal good qty demanded of a good increases as consumer income increases

Question 33

YED<0

Answer 33

inferior good qty demanded of a good decreases as consider income increases (inverse rs)

Question 34

YED=1

Answer 34

no classification a change in income leads to a *proportionately equal* change in qty demanded

Question 35

YED > 1

Answer 35

**superior/luxury good** % change in qty demanded does not change much in response to a price change bc consumers consider it essential

Question 36

importance of YED to firms (uses to firms)

Answer 36

**1. predict action of consumers in recession and growth** recession = incomes and employment decreasing e.g. luxury good, income elastic, recession = demand drop, growth = up inferior goods, income also elastic, recession = demand up necessity = not sensitive to either **2. subsidies and taxes, how much producers and consumers absorb** inelastic = more to consumers elastic = more to producers

Question 37

economic growth

Answer 37

when a country produces more goods and services in one period than in the previous one. it is usually measured by changes in real GDP

Question 38

economic growth

Answer 38

when a country produces more goods and services in one period than the previous one. it is usually measured by changes in real GDP

Question 39

economic recession

Answer 39

negative economic growth occurring over two or more quarters

Question 40

3 sectors of economy and def

Answer 40

primary sector: sector of economy that involves the **extraction of natural resources** secondary: ‘’ where raw materials are combined or changes through manufacturing **to make physical changes** tertiary: ‘’ where **services are provided to consumers**

Question 41

sectoral change (low income -> middle -> high)

Answer 41

the change in **structur of economy to increase or decrease production in one sector or another** low income: demand for **necessity income inelastic -> spend large share of their income on basic goods -> prod focus on primary** 75-15-10 (percentage of pri-sec-ter) middle income: **demnd for manufactured goods increases more rapidly as econ grow and achieve higher levels of national income -> up spending. disproportionately larger than income increase in sec(YED>1)**40-30-30 high nat.income: **consumers send disproportionately more on tertiary sec. (YED even higher) = tertiary largest sectr**5-30-65

Question 42

engel curve

Answer 42

a function that describes how household expenditure on a particular good or service changes w household income y-$/% x-income