Elasticities of demand

Question 1

Define Price Elasticity of demand?

Answer 1

PED measures the responsiveness of quantity demanded to a change in the price of the good or service.

Question 2

What is the formula for PED?

Answer 2

PED = %change in quantity demand / % change in price

Question 3

What’s on the bottom and why?

Answer 3

Price, because quantity is on the top

Question 4

What’s on the top and why?

Answer 4

Quantity, because price is on the bottom

Question 5

Determinants of PED?

Answer 5

• SUBSTITUTES
  
  • the availability of substitutes
• HABITUAL
  
  • whether consumption is habitual
• INCOME
  
  • the proportion of income spent on good or service
• TIME
  
  • the time period for consumers to adjust to spending patterns

Question 6

When is PED elastic?

Answer 6

If PED is > 1 it is elastic.

Question 7

What does an elastic PED mean?

Answer 7

It means that the % change in quantity demanded is greater than the % change in price

Question 8

When is PED inelastic?

Answer 8

If PED is < 1 it is inelastic

Question 9

What does an inelastic PED mean?

Answer 9

IT means that the % change in quantity demand is less than the % change in price

Question 10

When is PED perfectly inelastic?

Answer 10

If PED=0 then it is perfectly inelastic

Question 11

When is PED unitary?

Answer 11

When PED=1

Question 12

What does it mean when PED is unitary?

Answer 12

It means that the % change in quantity demanded is equal to the % change in price

Question 13

What are limitations of the PED?

Answer 13

• PED’s are generally estimates and may not be accurate
• PED’s may change over time
• PED’s assume ceteris paribus to other determinants of demand

Question 14

Define Cross elasticity of demand?

Answer 14

XED measures the responsiveness of demand for one product in relation to a change in the price of another product

Question 15

What is the XED formula?

Answer 15

XED= %change in quantity demanded of Product A / % change in price of product B

Question 16

What does a positive XED mean?

Answer 16

It means that the two goods are substitutes

Question 17

What does a negative XED mean?

Answer 17

It means that the two goods are compliments

Question 18

Define Income Elasticity of demand?

Answer 18

The responsiveness of demand of a good or service when income changes

Question 19

What is the YED formula?

Answer 19

YED= %change in quantity demanded / % change in income

Question 20

What does a positive YED mean?

Answer 20

A positive YED means that the product is a normal good

Question 21

What does a negative YED mean?

Answer 21

A negative YED means that the product is an inferior good

Question 22

How is YED relevant in business?

Answer 22

• YED estimates can be very useful to a firm when planning changes in output and productive capacity as well as changes in employment and stocks
• Estimates of YED enable a firm to forecast future market demand
• In an economic boom, firms can expect rise in the demand for normal goods and a fall in a recession

Question 23

How is XED relevant in business?

Answer 23

-XED estimates can be very useful to a firm when planning changes in output, employment and stocks in response to changes in the price of substitutes or compliments.