6A : price and income elasticity

Question 1

what factors would influence the quantity demanded for a product ?

Answer 1

• price : lower the price the higher the quantity demanded
• income of customers :
• advertising

Question 2

demand is price what when the value of elasticity is greater than 1

Answer 2

• price elastic :
  if demand for a good is price elastic then a%
  change in price will bring an even larger % change in the quantity demanded

Question 3

demand is price what if the value of elasticity is less than 1

Answer 3

• price inelastic : if demand for a food is price inelastic then a % change in price will bring a small % change in quantity demanded

Question 4

price elasticity of demand (ped)

Answer 4

• the sensitivity of demand for a product to price changes

Question 5

what are the factors that effect price elasticity ?

Answer 5

• branding : the stronger the branding the more price inelastic
• Competition for the same product : plenty of competition means price elastic
• number of close substitutes : rice, pasts the closer the substitute the more elastic as customers find it easy to switch.

Question 6

what is income elasticity ?

Answer 6

the sensitivity of demand to changes in income :

meaning that as income increases, the demand for that good increases even more proportionally

Question 7

what is the formula for income elasticity

Answer 7

% change in quantity demanded
———————————
% change in income

: since it is percentage change we need to convert raw numbers to %
to do this :

difference or number
——————————— x 100
original number

and then you put the % in its place in the formula

Question 8

what are luxury items ?

Answer 8

are income elastic . as income rises so does the quantity demanded e.g. cars , wines , furniture

(elasticity represented more than 1=elastic )

Question 9

what are necessities ?

Answer 9

are income inelastic. as income rises the quantity demanded will not change e.g. toothpaste ,shampoo.

( elasticity is represented between
0-1=inelastic )

Question 10

what are inferior goods ?

Answer 10

demand falls when income rises. elasticity shown as negative

Question 11

what are the factors that effect income elasticity

Answer 11

Consumer Preferences:

Changes in tastes and preferences can affect how much demand changes with income.

Availability of Substitutes:

If close substitutes exist, demand may be more elastic as consumers can switch to alternatives.