Elasticity

Question 1

What is price elasticity of demand(PED)?

Answer 1

Responsiveness of the quantity of a good demanded to changes in its price

Question 2

What is the equation for PED?

Answer 2

% change in quantity demanded of the product/% change in price of the product

Question 3

What happens if PED is zero?

Answer 3

The change in price will have no effect of Qd so it will be perfectly inelastic

Question 4

What happens if PED is infinity?

Answer 4

Any price rise above P1 will reduce demand to zero. This is said to be perfectly elastic

Question 5

What does it mean if the value of PED is less than one and greater than zero?

Answer 5

Inelastic demand

Question 6

What does it mean if PED is equal to 1?

Answer 6

A product has unit elastic demand

Question 7

What are determinants of PED?

Answer 7

1. Number and closeness of substitutes
2. Necessities vs luxuries
3. Proportion of income spent on a good

Question 8

What is the income elasticity of demand?(YED)

Answer 8

A measure of how much the demand for a product changes when there is a change in the consumer’s income

Question 9

What is the equation for YED?

Answer 9

% change in quantity demanded of the product/ % change in income of the consumer

Question 10

What is a normal good?

Answer 10

A product for which demand rises as income rises

Question 11

What is an inferior good?

Answer 11

A product for which demand falls as income rises

Question 12

What is the value of YED for normal and inferior goods?

Answer 12

Normal goods- positive

Inferior goods- negative

Question 13

What is the type of good if the YED value is less than one and what is the meaning?

Answer 13

An inferior good. A given increase in income will lead to a proportionally smaller fall in demand

Question 14

What is the type of good if the YED value is more than one and what is the meaning?

Answer 14

It is a luxury.

A given increase in income will lead to a proportionally larger increase in demand

Question 15

What is the type of good if the YED value is less than one and greater than zero and what is the meaning?

Answer 15

It is a necessity. A given increase in income will lead to a proportionally smaller increase in demand

Question 16

What is the price elasticity of supply? (PES)

Answer 16

A measure of the responsiveness of quantity supplied to changes in price

Question 17

How do you calculate PES?

Answer 17

% change in quantity supplied/ % change in price

Question 18

What determines PES?

Answer 18

1. How much costs rise as output increases
   - existence of unused capacity
   - mobility of factors of production
2. Ability to store stock
3. The time period considered

Question 19

What happens when demand is elastic to total revenue?

Answer 19

An increase in price causes a fall in total revenue while a decrease in price causes a rise in total revenue.

Question 20

What happens when demand is inelastic to the total revenue?

Answer 20

An increase in price causes an increase in TR while a decrease in price causes a fall in total revenue.

Question 21

Explain the concept of elasticity

Answer 21

A concept used to measure the change in the quantity demanded of a good or service in relation to price movements of that good or service

Question 22

What is the importance of PED for firms?

Answer 22

Allows them to predict the direction of change of their revenues given a price change

Helps them to determine the extent to which they can shift an indirect tax on to the consumer

Question 23

What is the importance of PED for governments?

Answer 23

Helps governments interested on increasing their tax revenues to decide on which goods to impose an indirect tax

Allows governments to estimate the size of the necessary tax required to decrease consumption of demerit goods