Elasticities

Question 1

Elasticity figures are only estimates

Answer 1

• Elasticity figure data may be collected through surveys however, reliability can be questionable
• Elasticity figure data may be collected through competitors thus, maybe a firm copies other firms’ data. Problems each firm is different thus, working out elasticity like this may not be accurate
• Elasticity figure data may be collected through past data to make predictions on what will happen to demand however, current consumer habits may have changed drastically compared to consumer habits in the past thus, again, not being accurate

Therefore, firms should only use elasticities as a guide but not on its own to make decisions

Question 2

All elasticities assume ceteris paribus

Answer 2

All elasticities assume only one factor affects demand however, there are many other factors that affect demand, supply etc. When business make decisions, it may not be reliable to just consider the impact on one factor but rather look at all the factors in order to obtain a general view of what actions should be taken regarding price, employment etc.

Question 3

PED varies along the demand curve

Answer 3

This means business can’t keep changing their price by the same amount and expect the same change in quantity demanded. They have to make new calculations each time as ped varies along the demand curve