2.5 - Elasticity

Question 1

Elasticity

Answer 1

The responsiveness of one variable to a change in another variable.

Question 2

Elasticity of demand:

Answer 2

is a measure of the responsiveness of the quantity demanded of a good or service to changes in one of the factors that determine it

Question 3

Price Elasticity of Demand (ped)

Answer 3

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

Question 4

(PED) =

equation

Answer 4

% change in quantity demanded of good X / % change in price of good X

Question 5

Price Elastic Demand

Answer 5

A change in price leads to a proportionally greater change in quantity demanded

Consumers demand is relatively responsive to price changes

PED > 1

Question 6

Price Inelastic Demand

Answer 6

A change in price leads to a proportionally smaller change in quantity demanded

Consumers demand is relatively unresponsive to price changes

0 < PED < 1

Question 7

Unitary Elastic Demand

Answer 7

A change in price leads to a proportionality equal change in quantity demanded.

PED = 1

Question 8

Perfectly Inelastic Demand

Answer 8

A change in price leads to no change the quantity demanded

PED = 0

Question 9

Perfectly Elastic Demand

Answer 9

A change in price would lead to an infinite change in the quantity demanded

PED = ∞

Question 10

Determinants of PED:

Answer 10

• The number and closeness of substitute goods
• The degree of necessity and how widely a product is defined
• The time period considered
• The proportion of income spent on the good

Question 11

When there is a change in the price of a good or service, the impact on the firm’s total revenue will depend on the —-

Answer 11

price elasticity of demand of a good.

Question 12

If a firm wishes to increase total revenue but has a product which demands is elastic, it should

Answer 12

not raise the price.

Question 13

If a firm wishes to increase total revenue but has a product which demands is inelastic, it should

Answer 13

raise the price.

Question 14

For any linear down sloping demand curve:

Answer 14

Demand price is elastic for high prices and low quantities
-Demand price is inelastic for low prices and high quantities
(Value of PED declines as you move downwards along the demand curve)

Question 15

When demand is inelastic, the tax incidence falls more on___ than ___

Answer 15

consumers than producers

Question 16

When demand is elastic, the tax incidence falls more on ____ than____

Answer 16

producers than consumers

Question 17

Total revenue =

Answer 17

price x quantity

Question 18

What is a commodity

Answer 18

is a primary good, and is an important input to production. They come from the land, are extracted from the land, or extracted from the sea.

Question 19

What is the demand for most primary commodities

Answer 19

The demand for most primary commodities is inelastic, with a low PED

• They generally have no substitutes
• Take up a small proportion of income and are used immediately.

Question 20

Manufactured goods:

Answer 20

Human made goods that have been produced from raw materials transformed through a production process

• Tend to have lower PEDs than commodities
  
  • Have substitutes
  • Generally one time purchases that take up a large percentage of income

Question 21

Income elasticity of demand (YED) explains

Answer 21

the direction and the extent to which the demand curve is shifted.

Question 22

YED is a measure of

Answer 22

how much the quantity demanded of a good will change in response to a change in consumers income.

Question 23

(equation) YED =

Answer 23

% change in quantity demanded of good X / % change in income (Y) of consumer

Question 24

Positive YED

Answer 24

as income increases, quantity demanded increases

- Normal good

Question 25

Negative YED

Answer 25

as income increases, quantity demanded decreased

- Inferior good

Question 26

Income Elastic Demand

Answer 26

A change in income leads to a proportionally greater change in the quantity demanded.

1 < YED < -1

Question 27

Income Inelastic Demand

Answer 27

A change in income leads to a proportionally smaller change in the quantity demanded

-1 < YED < 1

Question 28

Perfectly Income Inelastic Demand

Answer 28

A change in income leads to no change in quantity demanded

YED = 0

Question 29

when YED = 1

Answer 29

A change in income leads to a proportionately equal change in quantity demanded

Question 30

Industries in an economy are divided into 3 sectors:

Answer 30

1) Primary sector - includes all primary commodities
2) Secondary sector - includes industries goods manufactured from primary commodities or intermediate goods
3) Tertiary sector - all economic goods that are not tangible but improve quality of life

Question 31

Sectoral change:

Answer 31

The change in the structure of the economy to increase or decrease production in one sector or another

Question 32

Low income countries typically focus on output of

Answer 32

primary products