2.5 elasticity of demand

Question 1

Elasticity

Answer 1

It is the measure of a varibles reaction to a change in another variable.

Question 2

dEMAND Elasticity

Answer 2

Indicates the extent to which changes in price causes changes to the quantity demanded.

deman is elastic-=small changes in price causes bug changes in quantity demanded

demand in inelastic- given change in price causes reletivly smaller change in quantity demanded

demand Is unitary= total revenue doesn’t increase or decrease when price changes.

Question 3

The determinants of PED(SPLAT)

Answer 3

Some products are more responsive to a change in prices then other. THe factors are:

1. availability of substitutes(availability of sub result in higher PED)
2. Porportion of income( consumers are less responsive to price changes in cheaper products then expensive ones)
3. luxary or necessity(necessary=inelastic, luxary=elastic)
4. addictivness( addictivness causes product to be more inelastic)
5. time period( in short period consumers are less responsive but after a few time consumers find substitutes and are more responsive)

Question 4

Implecations of PED on frims

Answer 4

Helps firms maximise revenue

price inelasticity in demand= should raise prices

price elastic in demand= should lower prices

they can also use price discrimination to maximise revenue

Question 5

implecation of PED on gov

Answer 5

important to gov bcs of taxation and subsides

• taxing price inelastic in demand products can raise tax revenue while not harming firm.
• subsidising price elastic in demand products, can be greater then proportional income in quantity demanded.(good strategy to promote merrit goods)

Question 6

PED OF Primary commodities and manefacture porduct

Answer 6

PED of primary commodites (agriculutral products/raw materials) tend to be lower then that of manufactured goods (washing machines, cars, etc) for several reasons.

The reasons are:
SPLAT

Demand for primary commdoites= inelastic

demand fro manufactures goods=elastic

Question 7

Income elasticity of demand(YED)

Answer 7

Chnages in income cuses changes to the demand of good/service

This is how responsive change in quantity demanded is to change in income

Question 8

Interpreting YED values

Answer 8

`YED values can be posative nor negative, value is important to know the type of good.

Positive YED value= normal good (QD increases Y increases)
- normal goods can be luxaries and necessities

Negative YED value= Inferior good(DD increases when Y increases)
- inferior goods tend to be necessities