4. Elasticities

Question 1

Define elasticity

Answer 1

ELASTICITY: a measure of responsiveness

Question 2

Define elasticity of demand

Answer 2

ELASTICITY OF DEMAND: measure how much the demand of a product changes when there is a change in one of the factors that determine demand

Question 3

Elasticities of demand

Answer 3

1. PED - price
2. XED - price of another good
3. YED - income

Question 4

Define PED

Answer 4

PED: a measure which shows how much the quantity demanded changes when there is a change in the price of the product

Question 5

PED formula

Answer 5

Question 6

Range of PED (perfectly elastic/inelastic)

Answer 6

0 - infinity (theoretically, real values in between)

If PED = 0, change in price - no effect on quantity demanded -> demand perfectly inelastic

If PED = infinity, slightly change in P - significant change in quantity demanded -> demand perfectly elastic

Question 7

Inelastic demand

Answer 7

INELASTIC DEMAND: 0

CHnage in price - proportionally smaller change in quantity demanded - total revenue for firm will increase

Revenue boxes: a+b > b+c

Question 8

Elastic demand

Answer 8

ELASTIC DEMAND: 1

Change in price - proprotionally bigger change in quantity demanded - firm revenue will fall

(to rasie revenue should lower price)

revenue boxes: a+b < b+c

Question 9

Unit elastic demand

Answer 9

UNIT ELASTIC DEMAND: PED=1

Change in price - proportionate change in quantity demanded - revenue will not change

Question 10

Change in PED

Answer 10

In one diagram PED can vary at different points - the lower the price - the more inelastic PED - unlike high price (consumers there are less concerned with the price)

Question 11

Determinants of PED

Answer 11

1. Number, closeness of substitutes: the more substitutes - the more elastic (butter)
2. Necessity of the product and how widely it is used: food less elastic than luxury holidays (habit-forming - low elasticity - cigarettes, alcohol)
3. Time period considered: times change - consumer habits change - less elastic in short term - more leastic in long term

Question 12

PED and taxation

Answer 12

Consider elasticity when placing taxes - harm market + create unemployment

Question 13

Define XED

Answer 13

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

Question 14

XED formula

Answer 14

Question 15

Range of XED

Answer 15

XED ranges from positive to negative

XED > 0 goods are substitutes

XED < 0 goods are complements

Question 16

Define YED

Answer 16

YED: a measure of how much demand for a product changes when there is a change in consumers’ income

Question 17

YED formula

Answer 17

Question 18

Range of YED

Answer 18

YED ranges from positive to negative

YED > 0 good is normal

YED < 0 good is inferior (income rises - demand falls - off to better products)

Necessary goods income inelastic demand - income does not greatly affect demand (food)

Superior goods income elastic demand - income greatly affects demand (luxury holidays - good is want not need)

Question 19

Define price elasticity of supply

Answer 19

PRICE ELASTICITY OF SUPPLY (PES): measure how much the supply of a product changes when there is a change in the price of the product

Question 20

PES formula

Answer 20

Question 21

Range of PES

Answer 21

Range of PES from 0 to infinity (theoretically)

PES = 0 - supply perfectly inelastic - change in price no effect on quantity supplied (in short time - PES=0 because cannot quickly change production)

PES = infinity - supply perfectly elastic - change in price - big change in quantity supplied

Question 22

Inelastic supply

Answer 22

0< PES <1 - change in price very little change in quantity supplied

Question 23

Unit elastic supply

Answer 23

PES = 1 - change in price proportionate change in quantity supplied

Question 24

Elastic supply

Answer 24

1 < PES < infinity - change in price leads to proportionatelly higher change in quantity supplied

Question 25

Determinants of PES

Answer 25

1. _How much costs rise as output is increased_: if costs rise significantly but quantity dies not - inelastic - not worth Prevents rise in cost: unused capacity, mobility of factors pf production (moving from making one to making another with same factors of production) 2. _Time period considered_: the longer the time period, the more elastic PES - in long term increase their supply 3. _Ability to store stock_: able to store - can react to price changes - elastic PES

Question 26

Define commodities

Answer 26

COMMODITIES: raw materials such as cotton or coffee

Question 27

PED of commodities

Answer 27

Tend to have inelastic demand - necessities Manufactured goods demand - elastic - many substitutes

Question 28

PES for commodities

Answer 28

Inelastic supply of commodities - producers unable to respond to change quickly Supply of manufactured goods - more elastic Inealstic demand + inealstic supply = large swings in price of commodities - uncertainty for producers