Elasticity

Question 1

What is price elasticity for demand?

Answer 1

Law of demand tells us that consumers will respond to a price drop by buying more, but it does not tell us how much more. The degree of sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand.

Question 2

What is calculating elasticity of demand?

Answer 2

Price elasticity of demand can be calculated as follows:

PED = percentage in quantity deamnded/percent change in its price

Question 3

QUESTION: When the prices of CDs increased from 20$ to 22$, the quantity of CDs demanded decreased from 100 to 87. Calculate PED.

Answer 3

PED = 1.3

Question 4

Interpreting PED

Answer 4

Ed=1, demand is unit elastic. Consumers’ response and price change are in the same proportion.
Ed>1, demand is elastic. Consumers are relatively responsive to price changes.
Ed<1, demand is inelastic. Consumers are relatively unresponsive to price changes. m

Ed approaches infinity, demand is perfectly elastic. Consumers are very sensitive to price change.
Ed approaches 0, demand is perfectly inelastic. Consumers are very insensitive to price change.

Question 5

What are the determinants of the elasticity of supply?

Answer 5

1. Product storability and durability
2. Resource mobility and unused industry capacity
3. The time period

Question 6

How does product stability and durability affect the elasticity of supply?

Answer 6

Items that are durable and can be stored successfully without deterioration, such as minerals, wheat, wool and red wine, generally face a more elastic supply line. In such cases, a rise in price means that sellers can quickly and simply access the extra supplies of goods and services by reducing their stocks of unsold goods. As services cannot be stored, they face a more inelastic supply.

Question 7

How does resource mobility and unused industry capacity affect the elasticity of supply?

Answer 7

The quantity of a particular item supplied is likely to be more elastic if production levels can be readily and inexpensively changed by moving resources between industries. Supply is especially elastic when there is unused or spare productive capacity in an industry or firm. Here, the quantity supplied can be increased quickly following a rise in the price.

Question 8

How can the time period affect the elasticity of supply?

Answer 8

In the short term, it is often difficult for firms to expand supply following a price for their product, especially if resources are immobile and can’t be moved easily between uses, and if excess capacity in production by firms does not exist. In this case, supply is relatively more inelastic in the short term. However, in the long term, supply becomes more elastic. Over a greater number of years, the availability of most resources can be increased, making supply more responsive to price changes.