Elasticities

Question 1

Elasticity def

Answer 1

a measure of the sensitivity of one variable to changes in another variable

Question 2

PED def

Answer 2

Price elasticity of demand - a measure of the sensitivity of quantity demanded to a change in the price of a good or service

Question 3

PED eqt

Answer 3

percentage change in quantity demanded / percentage change in price

Question 4

percentage change eqt

Answer 4

N - O / O

Question 5

remember PED

Answer 5

ignore ‘-‘ sign

Question 6

if PED / S > 1

Answer 6

relatively price elastic - percentage change in quantity demanded > percentage change in price

Question 7

if 0 < PED / S < 1

Answer 7

relatively price inelastic - percentage change in quantity demanded < percentage change in price

Question 8

if PED / S= 1

Answer 8

unitary price elastic - percentage change in quantity demanded = percentage change in price

Question 9

total revenue etq

Answer 9

total revenue = price x quantity

Question 10

if PED / S= 0

Answer 10

perfectly inelastic - totally insensitive to price - price has no effect on demand

Question 11

PED / S= 0 on graph

Answer 11

straight vertical line

Question 12

0 < PED / S < 1 on graph

Answer 12

steep demand curve

Question 13

PED / S > 1 on graph

Answer 13

shallow demand curve (more horizontal)

Question 14

PED /S = 1 on graph

Answer 14

an actual demand CURVE / an straight 45 degree supply curve

Question 15

if PED / S= infinite

Answer 15

perfectly price elastic - change in price = quantity demand will fall to 0

Question 16

PED /S= infinity on graph

Answer 16

horizontal line

Question 17

total revenue: price inelastic

Answer 17

price increases, TR increases

Question 18

total revenue: price elastic

Answer 18

price increases, TR falls

Question 19

influences on PED

Answer 19

1. availability of substitutes
   more substitutes = easier to switch to cheaper alternative = price elastic
2. necessity or luxury
   necessity = no substitutes = price inelastic
   luxury = not essential / needed = price elastic
3. relative share of goods / service in overall expenditure
   cheap = not notice any small changes = price inelastic
   more expensive = more price elastic
4. time period
   price elasticity increases over time
   b/c if price increase for a short period of time still price inelastic b/c habit and commitment to a certain pattern of consumption. If long run, consumers eventually find a cheaper alternative

Question 20

Profit eat

Answer 20

total revenue - total costs

Question 21

total revenue: unitary price elastic

Answer 21

price rises / falls = no change

Question 22

direct tax def

Answer 22

a tax levied directly on an individual or organisation e.g. income tax

Question 23

indirect tax def

Answer 23

a tax levied on expenditure on goods or services e.g. specific / ad valorem tax

Question 24

specific tax def

Answer 24

a tax charged as a fixed amount per unit of good

Question 25

ad valorem tax def

Answer 25

a tax charged as a percentage of the price of a good

Question 26

indirect tax diagram

Answer 26

1. labels: in context / y = price, x = quantity / D, S, S+tax 2. inward shift in supply (tax per unit) 3. contraction in demand / new equilibrium 4. draw horizontal line where q2 hits S - tax levied on consumer is between p1 and p2 - whole area = tax revenue 5. if price inelastic = more tax levied on consumer 6. change in consumer / producer surplus

Question 27

subsidy def

Answer 27

a grant given by the government to producers to encourage production of a good or service

Question 28

subsidy diagram

Answer 28

1. labels: in context / y = price, x = quantity / D, S, S+subsidy 2. outward shift in supply (subsidy per unit) 3. extension in demand / new equilibrium 4. draw horizontal line where Q2 hits S - benefit of subsidy to consumer is between p1 and p2 - whole area = total cost of subsidy to government 5. if price inelastic = more benefit of subsidy to consumer 6. change in consumer / producer surplus

Question 29

ad valorem diagram

Answer 29

tax per unit increases as quantity increase so is a slope

Question 30

PES def

Answer 30

Price elasticity of supply - a measure of the sensitivity of quantity supplied to a change in the price of a good or service

Question 31

PES eqt

Answer 31

percentage change in quantity supplied / percentage change in price

Question 32

influences on PES (4)

Answer 32

1. Spare capacity - they cannot this into use 2. ease and cost of factor substitution - how easy resources cab be substituted between goods / if transferred easily 3. stock of infused products and components - if already have stock room = if sudden excess of demand can respond quickly and sell 4. time - elasticity increases over time - more time for suppliers to provide / respond

Question 33

YED def

Answer 33

a measure of the sensitivity of quantity demanded to a change in consumer incomes

Question 34

YED eqt

Answer 34

percentage change in quantity demanded / percentage change in consumer incomes

Question 35

YED > 0 (pos)

Answer 35

normal - increase in income, increase in demand

Question 36

YED < 0 (neg)

Answer 36

inferior - increase in income, fall in demand

Question 37

YED > 1

Answer 37

luxury good - increase in income, increase in demand

Question 38

0 < YED < 1

Answer 38

necessity - will be bought where there is a change of income or not

Question 39

remember YED

Answer 39

not all consumers view the goods in the same way

Question 40

YED = 1

Answer 40

unitary income elastic

Question 41

XED def

Answer 41

a measure of the sensitivity of quantity demanded of a good/ service to a change in price of another good / service

Question 42

XED > 0 (pos)

Answer 42

increase in price of good Y = increase in quantity demanded of good X = substitutes

Question 43

XED < 0 (neg)

Answer 43

increase in price of good Y = decrease of quantity demanded of good X (complements)

Question 44

0 < XED < +/-1

Answer 44

weak substitutes / complements

Question 45

XED > -/+1

Answer 45

strong substitutes / complements

Question 46

XED = 0

Answer 46

X and Y are unrelated

Question 47

SOUP CAN

Answer 47

Substitutes Positives Complements Negatives