2.5 ELASTICITY OF DEMAND

Question 1

Elasticity of Demand

Answer 1

A measure of the responsiveness of the quantity demanded of a good or service to changes in one of the factors that determines it.

Question 2

Price Elasticity of Demand

Answer 2

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

Question 3

PED FORMULA

Answer 3

PED = %CHANGE IN QUANTITY DEMANDED OF GOOD X/ % CHANGE IN PRICE OF GOOD X

Question 4

% CHANGE FORMULA

Answer 4

% CHANGE = (NEW-OLD/OLD) *100

Question 5

Inelastic Goods

Answer 5

Insensitive to changes in prices

Question 6

Price Inelastic Demand

Answer 6

A situation where the percentage change in the quantity of a good or service is less than the percentage change in its price.

Question 7

Elastic Goods

Answer 7

Sensitive to changes in price.

Question 8

Price Elastic Goods

Answer 8

A situation where the percentage change in the quantity of a good or service is greater than the percentage change in its price.

Question 9

General Characteristics of Inelastic Goods

Answer 9

1. Few Close Substitutes
2. High Degree of necessity
3. A small portion of income
4. Addictive
5. Required now, rather than later (Time)
6. Elasticity coefficient less than 1

Question 10

General Characteristics of Elastic Goods

Answer 10

1. Many Substitutes
2. Luxury Goods
3. A large portion of income
4. Non-Addictive
5. Plenty of time to decide, not urgent
6. Elasticity coefficient greater than 1

Question 11

PED

Answer 11

We use PED, to determine if demand for a good is elastic or inelastic.

Question 12

Inelastic Goods

Answer 12

Looks like an “I”-vertical

Question 13

Elastic Goods

Answer 13

Looks flatter.

Question 14

PED=0

Answer 14

PERFECTLY INELASTIC

Question 15

PED=INFINITY

Answer 15

PERFECTLY ELASTIC

Question 16

TOTAL REVENUE TEST

Answer 16

Inelastic
Price - increase
TR - increase
Price - decrease
TR - decrease
Elastic
Price - increase
TR - decrease
Price - decrease
TR - increase
Unit Elastic
Price - increase/decrease
TR - no change

Question 17

TAXES

Answer 17

Taxes on goods with INELASTIC demand, earn more revenue due to a change in price, changing Qd very little.

Question 18

INCOME ELASTICITY OF DEMAND

Answer 18

A measure of how much the quantity demanded of a good will change in response to a change in consumers’ incomes.

Question 19

YED FORMULA

Answer 19

YED=% CHANGE IN QUANTITY DEMANDED OF GOOD X/% CHANGE IN INCOME

Question 20

YED

Answer 20

If the coefficient is negative (inverse relationship) then the good is inferior. If the coefficient is positive (direct relationship) then the good is normal

Question 21

ENGEL CURVE

Answer 21

An Engel Curve is used to show the relationship between income and quantity demanded. Income is placed on the vertical axis
Quantity demanded on the horizontal axis

Question 22

SECTORS OF AN ECONOMY

Answer 22

As an economy grows over time, the relative size of these sectors, as a percentage of total output in the economy, changes. This process is defined as Sectoral Change. Economists use YED to understand what an increase in income will do to each sector.