3. Elasticity of Demand: PED and YED

Question 1

What is elasticity of demand

Answer 1

measure of how much the demand for a product changes when there is a change in price

Question 2

price elasticity of demand

Answer 2

measure of how much the Qd of a product changes when there is a change in P

Question 3

PED

Answer 3

%change in Qd/ %change in P

Question 4

PED (literal calculations)

Answer 4

((new Qd - original Qd)/original Qd) x 100/ ((new P - original P)/original P)

Question 5

when PED= 0

Answer 5

consumer demand is not responsive to a change in price- perfectly inelastic

Question 6

when PED = ∞

Answer 6

consumers are very responsive to a change in price- demand curve goes on forever and so Qd is infinite; if P is raised a bit demand falls to 0 (perfectly elastic)

Question 7

value of something relatively inelastic (ignoring negative)

Answer 7

0 < PED < 1

Question 8

inelastic demand

Answer 8

change in price leads to proportionally smaller change in Qd

Question 9

revenue

Answer 9

price of goods and services x number of units sold

Question 10

revenue box B + C

Answer 10

original revenue

Question 11

revenue A+B

Answer 11

new revenue

Question 12

value of something relatively elastic

Answer 12

1

Question 13

When price increases for an inelastic product..

Answer 13

the quantity demanded wont fall by a lot- total revenue increases

Question 14

when price decreases for an inelastic product…

Answer 14

the quantity demanded wont increase because customers arent responsive - total revenue decreases

Question 15

elastic demand

Answer 15

a change in price leads to a greater than proportionate change in Qd

Question 16

when price increases for an elastic product

Answer 16

the quantity demanded will fall by more in porportion- total revenue decreases

Question 17

when price decreases for an elastic product

Answer 17

the quantity demanded will increase - increasing total revenue

Question 18

unit elastic demand = PED= 1

Answer 18

when a change in P leads to a proportionate opposite change in Qd- rectangular hyperbola where revenue anywhere is constant and always has the same area

Question 19

when price deceases for a unit elastic product

Answer 19

there is no change in total revenue

Question 20

when price increases for a unit elastic product

Answer 20

there is no change in total revenue

Question 21

Determinants for PED

Answer 21

SPiNTime
number and closeness of Substitutes (S)
Proportion of Income spent 
Necessity of product (N)
Time period considered

Question 22

substitutes as a determinant for PED

Answer 22

more substitutes - more elastic demand
closer the substitutes - more elastic demand
eg. different brands of butter
fewer and less alike substitutes - inelastic demand
eg. oil

Question 23

necessity and how widely the product is defined as a determinant for PED

Answer 23

neccesity products are relatively inelastic eg. masks, food, cigs, alcohol (addictive)

HOWEVER if you define a product more specifically - meat as food demand is less inelastic as there are other alternatives

Question 24

proportion of income spent on a good as a determinant for PED

Answer 24

if a good costs very little and constitute small part of someones budget - demand is relatively inelastic

Question 25

time period considered as a determinant for PED

Answer 25

as P changes it takes time for consumers to change spending habits PED more inelastic in the short term and more elastic with time as they find new products or new products come into the market

Question 26

why is PED important for firms

Answer 26

so they can predict effects of pricing decisions on Qd thus their Total revenue

Question 27

why is PED important for the government

Answer 27

so they know what to put taxes on - cuz when product P rises, demand might fall --> affect tax revenue 1. usually place higher taxes on inelastic goods so demand wont fall significantly and lead to high unemployment

Question 28

primary commodities

Answer 28

raw materials

Question 29

manufactured products

Answer 29

inputs of labor and capital to create finished products

Question 30

PED for primary commodities (PC)

Answer 30

inelastic because the "consumers" (being producers/manufacturers) have less substitutes for raw materials if there was a decrease in P of a PC they wouldn't want more anyways if their production targets are set already

Question 31

PED for manufactured goods (MG)

Answer 31

elastic because more substitutes available for consumers from different producers

Question 32

income elasticity of demand (YED)

Answer 32

measuer of how much the demand for a product changes when there is a change in consumer income

Question 33

YED

Answer 33

%change in Qd/ %change in income

Question 34

YED for normal goods

Answer 34

positive sign

Question 35

if %increase in Qd < %increase in income..

Answer 35

0

Question 36

if % increase in Qd> % increase in income

Answer 36

YED > 1 = income elastic

Question 37

YED for superior goods

Answer 37

YED > 1 high income elasticity - as an increase in income allows people to buy more wants in greater number

Question 38

YED for inferior goods

Answer 38

YED < 0 negative sign - as demand decreases as income increases ppl start to buy superior goods

Question 39

why is YED important for firms

Answer 39

1. so thye know which markets to enter - products with high YED - large increase in demand as income rises so their markets will grow faster eg. income grows in a country higher demand for smartphones - oppo, huawei, iPhone 2. so they know which products to produce more of - if a country is expected to go into a recession (falling gnp) producers will want to make more inferior goods

Question 40

primary sector

Answer 40

agricultural fishing forestry mining - primary products

Question 41

secondary (manufacturing) sector

Answer 41

take raw materials to manufacture into producer goods | also includes construction

Question 42

tertiary (service) sector

Answer 42

services and intangible products eg. IT, education, mass media

Question 43

sectoral change

Answer 43

as countries and incomes grow the relative share of national output and employment changes - moving away from agriculture and towards secondary and tertiary sectors

Question 44

YED in sectoral change

Answer 44

1. demand for primary products is inelastic so when incomes grow, demand wont change that much 2. extra income will be spent on income elastic goods like manufactured products 3. services have high YED so output from this sector will increase as income increase

Question 45

relating to sectoral change: why might living standards of a population increase

Answer 45

demand for tertiary products grow more rapidly as income rises and a country grows

Question 46

YED for neccesities

Answer 46

0