CH3 ELAST OF DD n SS

Question 1

Define price elasticity of demand.

(PED)+Formula

Answer 1

PED measures the responsiveness of quantity demanded of a good due to a change in its price, ceteris paribus.
PED= %change in qty demanded for good A/%change in price of good A

Question 2

What is the significance of the magnitude of the PED?

Answer 2

Demand is price elastic : |PED| > 1
Demand is price inelastic: |PED|< 1

Question 3

Describe a good being price elastic.

Answer 3

A change in price results in a more than proportionate change in quantity demanded. The more price elastic the demand, the gentler the slope of the demand curve.

Question 4

Describe a good being price inelastic.

|PED|<1

Answer 4

Change in price results in a lass than proportionate change in quantity demanded. The more price inelastic the demand, the steeper the slope of the demand curve.

Question 5

What factors affect the PED for a Good or Service?

HINTS

Answer 5

Habits
Income (proportion)
Necessity (Degree)
Time
Substitutes

Question 6

How does habit make a good price elastic? (Demand)

Answer 6

Demand is price inelastic if people consume the good out of sheer habit or are addicted to the good. (e.g cigarettes or alcohol)
This may be habitual- a price increase in cigs or alc may not lead to a significant fall in qty demanded as many habitual consumers may not easily change their consumption habits and cut down on their cigarette or alc consumption.

Question 7

How does proportion of income spent on the good affect PED?

Answer 7

**The higher the proportion of income spent on the good, the higher the price elasticity of demand. **A rise in the price of any big-ticket item has a large impact on how consumers can spend on other goods, since by not doing so would mean a considerable sacrifices that has to be made of other purchases.
**The smaller the proportion of income spent on the good, the lower the price elasticity of demand. **

Question 8

How does the degree of necessity affect the PED of the good?

Answer 8

Demand for a necessity tends to be price inelastic as there is a limit on how much quantity demanded changes when price changes. The higher the degree of necessity, the lower is the PED
Demand for the luxury goods are price elastic as consumers can do without it when the price rises. The lower the degree of necessity, the higher the PED.

Question 9

How does time period affect PED?

Answer 9

The longer the time period, the more price elastic the demand.

Question 10

How does the number of substitutes affect the PED?

Answer 10

The larger the number of subtitutes, the greater the price elasticity of demand. The more closely related the goods, the higher the price elasticity of demand

Question 11

Define PRICE ELASTICITY OF SUPPLY

definition+formula

Answer 11

PES measures the responsiveness of quantity supplied of a good due to a change in the price of the good itself, ceteris paribus.
PES= (% change in qty supplied of A)/(% change in price of good A)

Question 12

What is the significance of the magnitude of PES?

Answer 12

Supply is price elastic if |PES|>1
(Change in price results in a more than proportionate change in quantity supplied, gentler slope)
Supply is price inelastic |PES|<1
(Change in price results in a less than proportionate chanhge in qty supplied, steep slope)

Question 13

What factors affect PES?

Answer 13

Time period
Mobility of factors of production
Spare capacity of firms
Level of stocks or inventories

Question 14

Why does time period affect the PES?

Answer 14

In the very short run, the producer is unable to respond to a price change because it is very difficult to increase the qty of any product. Supply is restricted to qty available in the market. Thus, supply is almost perfectly price inelastic.
In short run, supply is price inelastic
In long run supply is price elastic.

Question 15

How does mobility of factor of production affect PES?

Answer 15

The greater the ease and speed that resources can be shifted out of 1 line of production to the next, the greater the responsiveness of qty supplied to price changes.
Supply is price elastic if so.

Question 16

How does spare capacity of firms affect PES?

Answer 16

Spare capcity measures the extent to which an industry or economy is operating below sustainable lvl of production.
there are spare factor CELL

Question 17

How does lvl of stocks affect PES?

Answer 17

Firms that have a high level of stocks of output have the ability to respond to a rise in price. Supply is price elastic

Question 18

What is definition and formula of YED?

Answer 18

Price elasticity of demand measures the responsiveness of demand for a good due to a change in consumer’s income, ceteris paribus.
YED= (%change in demand for a good)/%change in income

Question 19

What is the significance of the sign and magnitude of YED?

Answer 19

Normal goods have +ve YED.
Luxury goods- YED >1
Necessities- YED<1
Inferior goods have -ve YED.

Question 20

Define cross elasticity of demand.

def and formula

Answer 20

XED measures the responsiveness of the demand for a good due to changes in the price of another good, ceteris paribus.
XED= %change in demand for A/%change in price for B

Question 21

What is the significance of the sign of the XED?

Answer 21

Positive XED- demand for a good and the price for another good changes in the same direction, goods are substitutes
Negative XED- demand for a good and the price of another good change in opp. directions, goods are complements
XED is 0, goods unrelated

Question 22

How does the relationship between goods affect XED for a good or service?

Answer 22

The stronger the relationship between 2 goods, the higher the magnitude of XED.