Chapter 5 - Elasticity

Question 0

Define Subsidies

Answer 0

Payments by government to producers to encourage production of a good or services. Often subsidies are found in farming where farmers receive funds from government per tonne or unit of output. This typically means that prices can be lower than would otherwise be the case.

Question 1

Define Price Elasticity

Answer 1

The responsiveness of demand to a change in the price level. The formula is percentage change in quantity demanded divided by percentage change in price.

Question 2

Define Incidence Of Tax

Answer 2

The proportion of a tax that is passed onto the consumer. If most of a tax rise is added to the consumer then the incidence of tax is said to be ‘high’. When demand is price inelastic then the incidence of tax tends to be high.

Question 3

Define Income Elasticity Of Demand

Answer 3

The proportion to which demand changes when there is a change in income.

Question 4

Define Normal Goods

Answer 4

Goods or services that will see an increase in demand when income rise.

Question 5

Define Inferior Goods

Answer 5

Goods and services that will see demand fall when income rises.

Question 6

Define Substitutes

Answer 6

Goods that can be used as alternatives to another good, for example bus and rail services or Mars Bars and Snickers. Close substitutes are good alternatives whereas weak substitutes are not very good or likely alternatives, such as gas-fired power in the UK and hydroelectric power.

Question 7

Define Commodity

Answer 7

A good that is traded, but usually refers to raw materials or semi-manufactured goods that are traded in bulk such as tea, iron ore, oil or wheat. Often they are unbranded goods (homogeneous) where all firms’ products are very similar and undistinguishable from each other.