AOS 1 U3 #3

Question 1

PES

Answer 1

The responsiveness of the quantity supplied, relative to the change in price.

Question 2

PED

Answer 2

The responsiveness of the quantity demanded, relative to the change in price.

Question 3

Relatively elastic demand

Answer 3

If the quantity of a particular good or service demanded changes more than proportionally with the change in price

Question 4

Demand unit elasticity

Answer 4

If the quantity demanded changes by the same proportion as the change in price

Question 5

Demand is relatively inelastic

Answer 5

If the quantity demanded changes less than proportionally to the change in price

Question 6

Relatively elastic supply

Answer 6

The quantity of a g/s supplied changes more than proportionally with the change in price

Supply is relatively elastic if PES is > 1

Question 7

Supply unit elasticity

Answer 7

The quantity supplied changes by the same proportion as the change in price

Supply is unit elastic if PES = 1

Question 8

relatively inelastic supply

Answer 8

The quantity supplied changes less than proportionally to the change in price

Supply is relatively inelastic if PES is < 1

Question 9

Factors that affect price elasticity of supply

Answer 9

Production period
Spare capacity
Durability of goods

Question 10

Production period (PES)

Answer 10

If the product takes a long time to make, then it’s PES tends to be very low in the short term.

It’s PES may increase over the long term as more resources are able to be reallocated into this area of shortage.

Question 11

Spare capacity (PES)

Answer 11

If a firm is able to quickly ramp up production or utilise resources which were previously unused, then the PES will be quite high.

If there are skill shortages or the firm is already at productive capacity, then the PES will be quite low.

Question 12

Durability of goods (PES)

Answer 12

Goods that can be easily stored tend to have much higher PES

Goods such as fresh food which have limited storage life tend to have much lower PES

Question 13

Factors that affect price elasticity of demand

Answer 13

The degree of necessity
Availability of substitutes
Proportion of income
Time

Question 14

The degree of necessity (PED)

Answer 14

If something is a need, we tend to be less responsive to price changes and the item is therefore inelastic

If something is a luxury item, it tends to be more elastic.

If the market for goods/services involve addiction, then it tends to be inelastic.

Question 15

Availability of substitutes (PED)

Answer 15

Products with many available substitutes tends to be more elastic and have a higher PED (greater than one).

Effective advertising can make products seem like they have no substitute and therefore reduces the PED.

Question 16

Proportion of income (PED)

Answer 16

If the price of the product takes up a very small percentage of our income, we tend to be less responsive to price changes.

For example, a 10% increase on something that costs $2.00 would be quite insignificant to my decision making.