Calculating and Interpreting Elasticity

Question 1

Ped calcualtion

Answer 1

%change in quantity demanded/%change in price

Qd2-Qd1/Qd1 * 100
P2-P1/P1 * 100

=

Question 2

Relatively Elastic Demand

Answer 2

PED > 1

- shape of graph (gentel slope)

percentage change in Qd is greater than the percentage change in price. In other words, there is a more than proportionate change in Qd than price

Question 3

Relatively inelastic demand

Answer 3

PED < 1

- shape of graph (steep)

occurs when percentage change in Qd is less than the percentage change in price. In other words, there is a less than proportionate change in Qd than price.

Question 4

Unitary elastic demand

Answer 4

PED=1

• linear completely slanted straight down or concaved

the percentage change in qd is equal to the percentage change in price. in other words, there is an equal proportionate change in qd and price.

Question 5

perfectly elastic demand

Answer 5

ped = infinity (sign)

qd is extremely responsive to changes in price
graph is a straight line -

Question 6

perfectly inelastic demand

Answer 6

qd is completely unresponsive to changes in price

PED = 0
shape of graph is | STRAIGHT DOWN

Question 7

YED CALCULATION

Answer 7

%change in qd/%change in income (Y)

Qd2-Qd1/Qd1 * 100

Y2-Y1/Y1 * 100

= positive (+) or negative (-)

Question 8

if yed is postive

Answer 8

it is a normal good
as income increases, demand for a normal good increases
these are usually of high quality

Question 9

yed is negative

Answer 9

as income increases, demand for an inferior good decreases

yed is negative
inferior good

Question 10

Xed

Answer 10

measures the responsiveness of quantity demanded of one good, Good ‘y’ to a change in the price of another good ‘good x’

Question 11

xed calculation

Answer 11

%change in qd of good y/% change in price of good x

qd2-qd1/qd1 * 100
p2-p1/p1 * 100
=

Question 12

interpreting xed

if xed is positive

Answer 12

When XED is positive, the goods are substitutes. This means if the price of one good increases, people will buy more of the alternative good. The higher the XED the closer the substitutes

Question 13

XED is negative

Answer 13

complements
When XED is negative, the goods are complementary i.e. they are used together. This means if the price of one goes up, people buy less of the other good. Equally if the price of one good goes down people buy more of the other. For example if the price of PS4 consoles go down, people will buy more PS4 games.

Question 14

pes calculation

Answer 14

% change in qs/% change in price

qs2-qs1/qs1 * 100
p2-p1/p1 * 100

=

Question 15

interpreting pes

Answer 15

ignore the sign because there is a positive relationship between quantity supplied and price

Question 16

elastic supply

Answer 16

pes > 1
/- shape of graph (gentle)

supply is mainly responsive to changes in price. where percentage change in qs is greater than percentage change in price.

Question 17

inelastic supply

Answer 17

pes < 1

supply is not very responsive to changes in price. %CHANGE IN QS IS LESS THAN %CHANGE IN PRICE

graph shape / steep

Question 18

unitary elastic supply

Answer 18

PES=1
percentage change in qs is equal to percentage change in price

linear /

Question 19

perfectly elastic supply

Answer 19

pes = infinity
qs is radically responsive to changes in price
graph is straight across -

Question 20

totally inelastic supply

Answer 20

pes = 0

supply is completely unresponsive to chnages in price
graph is straight down |

Question 21

factors affecting XED

Answer 21

1. BRAND LOYALTY- IF THERE IS BRAND LOYALTY FOR A GOOD, THE XED FOR SUBSTITUTE GOODS ARE LOW
2. SUCCESSFUL MARKETING CAMPAIGNS THAT MAKE A PRODUCT APPEAR UNIQUE WILL RESULT IN A LOW XED TO OTHER SUBSTITUTES
3. IF TWO GOODS HAVE NO RELATIONSHIP TO EACH OTHER, XED = 0

Question 22

When interpreting elasticity

Answer 22

separate the equal sign from the numerical value. if there is no sign, a positive value is understood