Elasticities

Question 1

What is the XED of complements

Answer 1

Always negative- close complements are greater than negative one, distant ones less than
⬆️ in price of good A leads to a ⬇️ in Qd of good B, so XED = +/- or -/+ and both = a negative
If close, then demand for A is more sensitive to changes in the price of B, but if distant then they can be consumed separately

Question 2

What is the XED of a substitute

Answer 2

Always positive- closer substitutes are more than one, whilst more distant substitutes are less than one (because closer substitutes are more sensitive to a price change)
For subs: ⬆️ in p of good A leads to a ⬆️ in Qd of good B

Question 3

Formula for price elasticity of supply (PES)

Answer 3

PES = %🔼Qs / %🔼P

Question 4

Define price elasticity of supply

Answer 4

The responsiveness of a quantity supplied to a given change in price, is always positive

Question 5

Formula of cross elasticity of demand (XED)

Answer 5

XED = %🔼Qd of good A/ %🔼P of good B

Question 6

Define cross elasticity of demand XED

Answer 6

The responsiveness of qd for 1 product to a given change in the price of another

Question 7

Formula of income elasticity of demand (YED)

Answer 7

YED = %🔼Qd/ %🔼Y

Question 8

Define income elasticity of demand YED

Answer 8

The responsiveness of quantity demanded to a given change in income

Question 9

Formula for price elasticity of demand

Answer 9

PED = %🔼Qd/ %🔼P

Question 10

Define price elasticity of demand

Answer 10

The responsiveness of quantity demanded to a given change in price

Question 11

Why is PED always negative

Answer 11

Because of the law of demand- price and quantity demanded have an inverse relationship

Question 12

If PED>1

Answer 12

the %🔼Qd > %🔼P, so the consumers are quite responsive, so demand for the good is relatively elastic, e.g. PED= -2, perfectly=infinity

Question 13

If PED<1

Answer 13

Small/big, so p inelastic, perfectly=0

Question 14

If YED is positive…

Answer 14

Qd increases as real income rises, a normal good

Question 15

If YED is negative…

Answer 15

Qd decreases as real income rises, inferior good

Question 16

If positive YED and >1…

Answer 16

Qd increases by proportionally more than the rise in real income, a luxury good

Question 17

If YED is positive and <1…

Answer 17

Qd increases by proportionately less than the rise in real income, necessity

Question 18

Factors determining PED

Answer 18

Necessities inelastic
Luxuries elastic
Addictive/ brand loyalty inelastic
Availability of subs
Peak and off peak D

Question 18

PED and tax rev

Answer 18

If firm selling gd that’s PED inelastic then most of burden passed on to consumer

When gd elastic, larger tax burden because D will fall and so lower total rev

Question 18

PED and total rev

Answer 18

TR=p x q, if gd inelastic then ⬆️ TR (as firms will ⬆️p), if gd elastic and firm will ⬆️p and so ⬇️ TR

Question 18

Factors determining YED

Answer 18

For luxury, ⬆️Y=⬆️D so YED>1
Poorer by necessities and inferior gds, so for these as income ⬆️, D⬇️ so YED<0
For normal gds D⬆️ as Y⬆️, so YED>0

Question 18

When S is elastic

Answer 18

PES>1, if perfectly elastic = infinity (any QD can be met without changing p)

Question 19

When S is inelastic

Answer 19

PES<1, if perfectly inelastic =0 (S is fixed, so cannot meet a change in D)

Question 20

Factors determining PES

Answer 20

Time frame (SR=elastic)
Stockpiles (⬆️ stockpiles=⬆️ elastic)
Length of prod process (seasonal, v long= less responsive)
Access/ availability of resources (easy access=elastic)
Availability of prod surplus (if prod highly specialised= inelastic) (if lots of producers who can easily switch their market=elastic, but if prod process dissimilar to others then inelastic)