4.1.3.2/4/6- PED, PES, XED, YED

Question 1

Define elasticity

Answer 1

The measure of how much one variable changes in response to the change in another variable

Question 2

Define PED

Answer 2

Price elasticity of demand - the measure of responsiveness of a change in demand for a good or service to a change in its price

Question 3

Define PES

Answer 3

Price elasticity of supply - the responsiveness of the quantity supplied of a good or service to a change in its price

Question 4

Define XED

Answer 4

Cross elasticity of demand - measures the responsiveness of demand for good A to a change in price of good b

Question 5

Define YED

Answer 5

Income elasticity of demand - measures the responsiveness of quantity demanded of a good to a change in income

Question 6

Formula for PED

Answer 6

% change Qd / % change P

Question 7

Formula PES

Answer 7

% change Qs / % change P

Question 8

Formula XED

Answer 8

% change Qd (good A) / % change P (good B)

Question 9

Formula YED

Answer 9

% change Qd / % change Y

Question 10

Describe Perfectly inelastic PED

Answer 10

• PED value of 0
• despite the change in price, quantity will never change
• when price doubles, Total revenue will doubles
• relationship between TR and change in price is directly proportional

Question 11

Describe inelastic PED

Answer 11

• absolute PED value of less than 1
• quantity demanded is not very responsive to price changes
• when price rises, TR will also rise

Question 12

Describe a unitary elastic PED

Answer 12

• PED value of exactly -1
• the there is the same %change in quantity as % change in price
• a change in price doesn’t affect the TR

Question 13

Describe an elastic PED

Answer 13

• absolute PED value of more than 1
• price is very responsive to price changes
• when price increases TR will decrease

Question 14

Describe a perfectly elastic PED

Answer 14

• PED value of infinity
• demand is extremely responsive to changes in price
• if price increases, demand will fall to 0
• TR and change in quantity are directly proportional

Question 15

What are the factors affecting PED

Answer 15

PLANTS
- proportion of income
- luxury or necessity good
- addictive
- number of uses
- time
- substitutes

Question 16

How does proportion of income affect PED

Answer 16

the more expensive or higher percentage of total budget that a good takes up, the more elastic demand

Question 17

How does luxury or necessity affect PED

Answer 17

• luxuries have a more elastic PED, whilst necessities have an in elastic PED

Question 18

How does addiction affect PED

Answer 18

Is a good is addictive, people need it to feel happy or stable therefore goods have an in elastic PED

Question 19

How does no of uses affect PED

Answer 19

Is an item has multiple uses, it is more helpful so will have a more inelastic PED

Question 20

How does time affect PED

Answer 20

Overtime, consumers are more likely to respond to price changes as they will find adequate substitutes meaning PED will become more elastic overtime

Question 21

How does substitutes affect PED

Answer 21

If a good has many substitutes it will have an elastic PED as there are alternatives that can be used

Question 22

What is the gradient of a demand cure with an elastic PED

Answer 22

Smaller gradient, shallower line

Question 23

What is the gradient of a demand cure with an inelastic PED

Answer 23

Larger gradient and steep slope

Question 24

Why is PES positive

Answer 24

An increase in price will incentivise firms to supply more and a decrease in price will incentivise firms to supply less

Question 25

Describe a perfectly inelastic PES

Answer 25

- PES value of 0 - supply is not responsive to any changes of price that may occur

Question 26

Describe an inelastic PES

Answer 26

- PES value of less than 1 - supply is less responsive to price changes

Question 27

Describe a unitary elastic PES

Answer 27

- PES value of 1 - there is an exactly equal % change of price to quantity supplied

Question 28

Describe an elastic PES

Answer 28

- PES value of more than 1 - supply is more responsive to price

Question 29

Describe a perfectly elastic PES

Answer 29

- PES value of infinity - supply only occurs at one price, so at this price the quantity supplies is unlimited. There is no supply at any other price

Question 30

List the factors affective PES

Answer 30

SIFT - spare production capacity - inventory available - factor substitution - time

Question 31

How does spare production capacity affect PES

Answer 31

More spare production capacity enables firms to quickly increase their production, leading to a more elastic PES

Question 32

How does inventory available affect PES

Answer 32

If there is a larger inventory, firms will be able to produce more goods quickly, increasing the elasticity of PES

Question 33

How does factor substitution affect PES

Answer 33

If you can switch factors pf production quickly, a change in production can occur more quickly, meaning that PES is more elastic

Question 34

How does time affect PES

Answer 34

The more time there is, the more elastic PES a good will develop

Question 35

How are substitutes demonstrated by XED

Answer 35

A positive XED - the relationship between the demand of good A and good B is inversely proportional

Question 36

How are compliment goods demonstrated by XED

Answer 36

Negative XED - there is a directly proportional relationship between the demand for good A and the demand for god B

Question 37

How are unrelated goods demonstrated by XED

Answer 37

- close to 0 There is no relationship between the goods

Question 38

How does income elasticity of demand show a normal good

Answer 38

- a positive YED As income increases, the demand for the good also increases

Question 39

How does YED demonstrate an inferior good

Answer 39

- Negative YED As income increases, the demand for inferior goods deceases