Competitive markets- demand and supply

Question 1

What is elasticity?

Answer 1

A measure of the responsiveness of the quantity demanded or supplied of a good or service, to changes in any of the factors that determines it.

Question 2

What is the equation for any elasticity?

Answer 2

Place the percentage change quantity over the change in price

Question 3

What do the values of PED mean?

Answer 3

>1: Elastic
<1: Inelastic
=0: Perfectly inelastic
=1: Unitary elastic
=infinity: Perfectly elastic

Question 4

What are the determinants of PED?

Answer 4

Number of and closeness of substitutes
Degree of necessity
Time period
Proportion of income spent on good

Question 5

What are primary commodities?

Answer 5

Goods that are derived from raw materials, and don’t need processing. e.g. fruit. They have low PED

Question 6

What is cross-price elasticity of demand?

What are the significance of the values?

Answer 6

A measure of the responsiveness of the quantity demanded of a good or service to changes in the price of another good.

(Change in quantity demanded of X)/(Change in price of Y)

=0: goods are unrelated
>1: goods are substitutes
<1: goods are complementary

Question 7

Could firms use XED to their advantage? How?

Answer 7

Producing substitute goods- Cola and Fanta

Producing close complements to make profit-cake and coffee

Question 8

What is YED. What are the significance of its values?

Answer 8

A measure of responsiveness of the quantity demanded of a good or service to changes in people’s incomes.

> 1: Normal good
<1: Inferior good

Question 9

What is economic growth?

Answer 9

A positive GDP growth in a specific time period. It usually implies a growth in employment in the economy and therefore in people’s incomes.

Question 10

Determinants of PES?

Answer 10

Time scale
Mobility of FOP’s
The unused capacity
Ability to store stock