Elasticities

Question 1

What is price elasticity of demand?

Answer 1

The proportional responsiveness of demand to changes in price

Question 2

What is the formula for PED?

Answer 2

% change in QD / % change in P

Question 3

Which 5 classes of PED exist and at what values?

Answer 3

1. Perfectly inelastic (0)
2. Relatively inelastic (0-1)
3. Unitary (1)
4. Relatively elastic (>1)
5. Perfectly elastic (infinity)

Question 4

What are the 4 main factors influencing PED?

Answer 4

1. Availability of substitutes (higher means higher PED)
2. Addictiveness of the product (higher means lower PED)
3. Price of product as a proportion of income (higher means higher PED)
4. Time period (longer means higher PED)

Question 5

What is income elasticity of demand (YED)?

Answer 5

The proportional responsiveness of demand to changes in income

Question 6

What is the formula for YED?

Answer 6

% change in demand/ % change in income

Question 7

What are the 3 types of goods as determined by YED?

Answer 7

1. Normal necessity (0-1)
2. Normal luxury (>1)
3. Inferior good (<0)

Question 8

Which types of good see a rise in demand during recessions?

Answer 8

Inferior goods

Question 9

What is cross price elasticity of demand (XED)?

Answer 9

The proportional responsiveness of the demand for a substitute good to changes in prices

Question 10

What is the formula for XED?

Answer 10

% change in demand for good A / % change in price of good B

Question 11

What 3 types of relationships between good can be revealed by XED?

Answer 11

1. Complementary goods (<0)
2. Substitutes (>0)
3. Unrelated goods (0)

Question 12

Why is knowledge of PED important to firms?

Answer 12

Price-setting

Question 13

Why is knowledge of PED important to the government?

Answer 13

Tax and subsidy levels

Question 14

Why is knowledge of XED important to firms?

Answer 14

Adjust pricing strategies and analyse competitors’ pricing strategies

Question 15

Why is knowledge of YED important to firms?

Answer 15

Helps determine what types of goods to sell during recessions and booms

Question 16

What is the revenue rule of PED?

Answer 16

To maximise revenue, firms should raise prices of inelastic products and drop prices of elastic products

Question 17

What is price elasticity of supply (PES)?

Answer 17

The proportional responsiveness of supply to changes in prices

Question 18

What is the formula for PES?

Answer 18

% change in QS / % change in price

Question 19

Which 5 classes of PES exist and at what values?

Answer 19

1. Perfectly inelastic (0)
2. Relatively inelastic (0-1)
3. Unitary (1)
4. Relatively elastic (>1)
5. Perfectly elastic (infinity)

Question 20

What are the 5 main factors influencing PES?

Answer 20

1. Mobility of the factors of production (higher means higher PES)
2. Availability of raw materials (higher means higher PES)
3. Ability to store goods (higher means higher PES)
4. Spare capacity (higher means higher PES)
5. Time period (longer means higher PES)

Question 21

What is the difference between short-run and long-run?

Answer 21

In the short-run, at least one of the factors of production is fixed

Question 22

What are the 4 factors of production?

Answer 22

1. Land
2. Labour
3. Capital
4. Enterprise