elasticities

Question 1

what does price elasticity of demand measure

Answer 1

the responsiveness to a change in price of demand

Question 2

what does income elasticity of demand measure

Answer 2

the responsiveness of demand to a change in income

Question 3

what cross elasticity of demand measure

Answer 3

the responsivensss of demand of good A when the price of substitute or complementery good B changes

Question 4

what is the formula for price elasticity of demand

Answer 4

%change in Qd/
%change in P

Question 5

what is the formula for income elasticity of demand

Answer 5

%change in Qd/
%change in Y

Question 6

what is the formula for cross elasticity of demand

Answer 6

%change in Qd of good A/
%change in P in good B

Question 7

when is demand price inelastic

Answer 7

when PED < 1

Question 8

when is demand price elastic

Answer 8

when PED > 1

Question 9

when is demand of unitary price elasticity

Answer 9

when PED = 1

Question 10

when is demand perfectly elastic

Answer 10

when PED = infinity

Question 11

when is demand perfectly inelastic

Answer 11

when PED = 0

Question 12

what does elastic demand look like

Answer 12

a small change in price causes a large change in the quantity demanded

Question 13

what does inelastic demand look like

Answer 13

a change in price doesn’t change the quantity demanded much

Question 14

how does the availability of substitutes affect the PED

Answer 14

the more substitutes there are, the higher price elasticity will be

Question 15

how does the share of a person’s budget affect the PED

Answer 15

if the cost of the product takes up a large share of a person’s disposable income, its price elasticity will be higher

Question 16

how does how addictive a product is affect the PED

Answer 16

the more addictive a product is, the lower the price elasticity

Question 17

what type of demand occurs in complementary goods

Answer 17

joint demand

Question 18

what type of demand occurs in substitute goods

Answer 18

competing demand

Question 19

describe the relationships between the quantity demanded and the price in joint demand (cross elasticity of demand)

Answer 19

-as the QD of good A increases, the QD of good B also increases because they have joint demand
-as the price of good A increases then the QD demanded of good B decreases

Question 20

is the cross elasticity of demand for complementary goods positive or negative

Answer 20

the cross elasticity of demand for complementary goods is always negative because the demand for one good decreases when the price for the complementary good increases

Question 21

describe the relationships between the quantity demanded and the price in competing demand (cross elasticity of demand)

Answer 21

-as the QD of good A increases, the QD of good B decreases because they are in competing demand
-as the price of good A increases the QD of good B also increases

Question 22

is the cross elasticity of demand for substitute goods positive or negative

Answer 22

the cross elasticity of demand for substitute goods is always positive because the demand for one good increases when the price for the substitute good increases.

Question 23

what is the relation between supply and price on the supply curve

Answer 23

supply is positively related to price

Question 24

why is there a positive relation between supply and price

Answer 24

supply goes up as the price goes up because firms are assumed to be profit maximisers - they will supply more if a higher price can be achieved

Question 25

what leads to movement along the supply curve

Answer 25

changes in price lead to movement along the supply curve

Question 26

what are factors (other than price) that cause shifts in the supply curve

Answer 26

-costs of production (wages, materials, energy, borrowing costs) -availability of technology -taxes -subsidies or grants given by the government -weather (farming) -geopolitics

Question 27

what would happen to the supply curve if wages increased

Answer 27

shift left

Question 28

what would happen to the supply curve if there was an improvement in technology

Answer 28

shift right

Question 29

what would happen to the supply curve if raw material costs increased

Answer 29

shift left

Question 30

what would happen to the supply curve if government gives a grant

Answer 30

shift right

Question 31

what would happen to the supply curve if there were taxes

Answer 31

shift left

Question 32

what effect do specific taxes have on the supply curve

Answer 32

SHIFT left

Question 33

what effect do ad valorem taxes have on the supply curve

Answer 33

increase in gradient / steeper line

Question 34

when is the price elasticy of supply elastic

Answer 34

when the good is easily accessible and doesn't take a long time to produce