3. PED

Question 1

Price elasticity of demand

Answer 1

to what extent will Qd change if there is a change in P

Question 2

PED =

Answer 2

(%Δ in Qd)/(%Δ in P)

Question 3

1) If PED>1
2) If PED=1
3) If PED<1

Answer 3

1) D is elastic – changes more than it should – products that are more easily replaceable – pens, notebooks…
2) D is unitary (perfectly inverse proportional – CPE)
3) D is inelastic – changes less than it should (less affected) – electricity, gas, cigarettes, medicine…

Question 4

Determinants of PED

Answer 4

1) number and closeness of substitute goods
2) necessity of the product
3) the proportion of Y spent on a good
4) time period considered
5) government intervention (subsidies and taxes)

Question 5

1) substitute goods
2) necessity
3) the proportion of Y
4) time period
5) government intervention

Answer 5

1) many substitutes = high elasticity
2) high necessity = low elasticity
3) high proportion of Y = high elasticity
4) short run = inelastic, long run = elastic
5) subsidized = elastic D (relatively cheap), taxed = inelastic D

Question 6

subsidy

Answer 6

money granted by a government mostly to a producer but also in some cases to a consumer per unit per output

Question 7

TR (total revenue) =

Answer 7

P*Q (price times quantity demanded)

Question 8

1) 0<PED<1
2) 1<PED<∞

Answer 8

1) inelastic D
- proportional relationship between P and TR (bigger TR if P is increased – Qd not affected as much)
2) elastic D
– inverse proportional relationship between P and TR (Qd affected more than P)

Question 9

how to calculate profit and total cost?

Answer 9

Profit = TR – TC (total cost)
(zero profit = TR=TC
Abnormal/supernormal profit => TR>TC)
TC = FC (fixed cost) + VC (variable cost)

Question 10

marginal cost

Answer 10

MC (extra cost) = ΔTC/ΔQ
- gets added to the TC (e.g. extra labor)

Question 11

graph elastic and inelastic D graphs

Answer 11

…

Question 12

graph and give example two two exceptions in PED

Answer 12

…
perfectly inelastic - at any P the same Q will be bought (cancer treatment/medicine)
perfectly elastic - at one P infinite (any) Q will be bought (Dolac)

Question 13

YED (___) measures the…

Answer 13

income elasticity of demand
…responsiveness of quantity demanded given the change in income.

Question 14

YED =

Answer 14

(%Δ in Qd)/(% Δ in Y)

Question 15

% change =

Answer 15

(difference)/(original value)*100%

Question 16

1) normal goods/necessities/superior goods
2) inferior goods

Answer 16

1) YED > 1 – positive – elastic
2) YED < 1 – negative – inelastic

Question 17

normal goods

Answer 17

YED>1 - demand is income elastic (normal luxury - we haven’t been buying it much before the rise in Y)
YED<1 - demand is income in-elastic (normal necessity - we’ve buying it even before the rise in Y)

Question 18

inferior goods (ignoring the sign)

Answer 18

YED>1 - demand is income elastic
YED<1 - demand is income in-elastic
YED=0 - demand is perfectly income in-elastic