2.6 Elasticity

Question 1

how to Calculate PED ?

Answer 1

Question 2

what do different PED’s look like ?

Answer 2

Question 3

what are the determinants of PED?

Answer 3

• availability of substitutes: the fewer the number of close substitutes the lower the PED
• time period: generally, the shorter the time period, the lower the PED
• the extent to which the product is a necessity: necessities have a lower PED than luxuries
• proportion of income allocated to the product: the lower the proportion of income allocated to a product the lower the PED, e.g rice inelastic PED

Question 4

what do different PED values tell us ?

Answer 4

• if PED < -1 demand is said to be relatively price inelastic
• if PED > -1 demand is said to be relatively price elastic
• if PED = -1 demand is said to be price unitary elastic

Question 5

what are disadvantages of PED, PES, XED AND YED ?

Answer 5

1) the data are based on estimates so may not be very accurate
2) the limitation of ceteris paribus - if other factors changed, the accuracy of the elasticity may be changed
3) often the estimated value for the elasticity are based on past data, so doesn’t tell you about future trends

Question 6

what do different PES values tell us ?

Answer 6

• if PED < 1 demand is said to be relatively price inelastic
• if PED > 1 demand is said to be relatively price elastic
• if PED = 1 demand is said to be price unitary elastic

Question 7

how to Calculate PES ?

Answer 7

Question 8

what do different PES’s look like ?

Answer 8

Question 9

what are the determinants of PES?

Answer 9

• availability of stocks: if a product is not easily stored (perishable goods), the supply will tend to be price inelastic
• availability of FoP: if supply of factors used in production are relatively price inelastic, the supply of the G/S is likely to be price inelastic visa versa
• mobility of FoP: if supply of factors used in production are relatively mobile, the supply of the G/S is more likely to be price elastic visa versa

Question 10

what does the polarity of XED indicate ?

Answer 10

• Positive XED indicates that good X and Y are subsidies, since when price of good X increase the QD of good Y increases
• Negative XED indicates good X and Y are compliments

Question 11

how to calculate XED ?

Answer 11

Question 12

what does the magnitude of XED indicate ?

Answer 12

• If XED > 1 demand for the G/S is said to be cross price elastic
• if XED < 1 demand for the G/S is said to be cross price inelastic
• if XED close to 0 then the 2 goods are unrelated
• the greater the magnitude of XED the closer the substitute/compliment

Question 13

what is YED ?

Answer 13

YED measures the responsiveness of quantity demanded of a product to a change in income

Question 14

what does the polarity of YED indicate ?

Answer 14

• Positive YED indicates demand responds normally to changes in income, increase income, increase demand, this G/S is considered a normal good
• Negative YED indicates and increase in income leads to a decrease in demand, this is considered an inferior good

Question 15

what does the magnitude of YED indicate ?

Answer 15

• if the YED > 1 demand for the G/S is income elastic
• if YED < 1 demand for the G/S is income inelastic
• YED close to 0 demand is unrelated to a change in income

Question 16

how to calculate YED ?

Answer 16

Question 17

what are the Factors influencing YED ?

Answer 17

• necessity goods and normal goods have low positive YED, e.g milk
• superior/ luxury goods that have high positive YED
• inferior goods have negative YED