Demand Elasticity

Question 1

Elasticity

Answer 1

Responsiveness - how much something changes when there is a change in another determinant

Question 2

Price elasticity of demand

Answer 2

Degree of responsiveness of the quantity demanded of a good or service when the price changes

Question 3

What is price elasticity affected by?

Answer 3

Availability of substitutes - plenty of substitutes, price sensitive good, few substitutes, price-insensitive good

Question 4

How to calculate price elasticity?

Answer 4

% change in quantity/% change in price (q1-q0/qo/p1-p0/p0)

Question 5

Inelastic demand

Answer 5

Change in price causes a less than proportionate change in quantity demanded, steep gradient

Question 6

Unitary elasticity

Answer 6

Change in price causes an exact proportionate change in quantity demanded, 45* angle

Question 7

Elastic demand

Answer 7

The change in price causes a more than proportionate change in quantity demanded, not a steep gradient

Question 8

What does elasticity vary between?

Answer 8

Infinity and zero

Question 9

What does elasticity vary on a demand curve?

Answer 9

Based on the size of the percentage change of quantity and demand.

Question 10

What are the two demand elasticity extremes?

Answer 10

When ep=0 as is a necessity for survival, line is vertical. When ep=infinity, line is horizontal as unlimited demand.

Question 11

What are the 4 determinants of price elasticity?

Answer 11

S T I L
Availability of substitutes, time span, proportion of income spent, luxury or necessity

Question 12

Explain availability and closeness of a substitute as a determinant of price elasticity

Answer 12

When there is a large number of close substitutes, the demand is very elastic as when price goes up a small amount, demand drops by a large amount

Question 13

Explain time span as a determinant of price elasticity

Answer 13

In the short term, goods are inelastic as not many alternatives. In the long run, alternative may become available and good becomes elastic

Question 14

Explain proportion of income spent on good/service as a determinant of price elasticity

Answer 14

If proportion of income spent on good is small, change in price will have a less than proportionate effect on the quantity demanded. Depending on a persons income, a good can be elastic or inelastic

Question 15

What is an elastic good?

Answer 15

When the price changes by a small amount, the quantity demanded changes by a big amount - price sensitive good

Question 16

What is an inelastic good?

Answer 16

When the price changes by a small amount, the quantity demanded changes by a small amount - price insensitive good.

Question 17

TR

Answer 17

Total revenue

Question 18

How to calculate TR

Answer 18

Price x quantity

Question 19

As price increases, total revenue increases -what type of good?

Answer 19

Inelastic good (necessity)

Question 20

As price increases, total revenue is equal, what type of good?

Answer 20

Unitary

Question 21

As price increases, total revenue decreases - what type of good is it?

Answer 21

Elastic good (luxury/wants)

Question 22

Why is a firm interested in elasticity?

Answer 22

FIrms see the impact of total revenue change when price changes

Question 23

Why is the government interested in elasticity?

Answer 23

Understand the implications of imposing taxes and subsidies of goods.

Question 24

Primary commodities

Answer 24

Goods that may be grown or come from nature ie wheat, minerals, cotton.

Question 25

Are primary commodities elastic or inelastic?

Answer 25

Inelastic as there is few substitutes

Question 26

Manufactured products

Answer 26

Goods created using capital from primary commodities. Tend to have more substitutes available so are more elastic

Question 27

What does income elasticity of demand measure?

Answer 27

Degree of change of Qd when Y changes

Question 28

Normal good

Answer 28

Necessities and luxuries

Question 29

Inferior goods

Answer 29

Quantity demanded falls when income increases

Question 30

Engel curve

Answer 30

Curve that shows relationship between income and the demand for a product over time

Question 31

Why is an engel curve shaped the way that it is?

Answer 31

As income increases, consumers purchase more of normal goods. As income continues to rise, the normal good becomes inferior as they switch to luxury.