Elasticity

Question 1

Define Price Elasticity of Demand

Answer 1

The responsiveness of the quantity demanded to a change in price

Question 2

Define inelastic demand

Answer 2

where demand has little response to changes in price. Steep curve

Question 3

Define elastic demand

Answer 3

Where changes in price result in large changes in demand. Flatter curve

Question 4

Perfectly Elastic Demand

Answer 4

demand where PED=0, a change in price has no change in quantity demanded.

Question 5

Relatively inelastic PED

Answer 5

PED between 0 and -1. %Change in demand smaller than %Change in price. Small change in demand when price changes.

Question 6

Unitary Elastic PED

Answer 6

PED is equal to -1. % Change in demand is exactly equal to % change in supply.

Question 7

Relatively inelastic PED

Answer 7

PED between -1 and negative infinity. % Change in demand is more than the % change in price

Question 8

Factors Affecting PED

Answer 8

SPLAT. Substitutes, Proportion of income, Luxury/Necessity, Addiction/habit, Time period following price change.

Question 9

Total Revenue=

Answer 9

Price x Quantity.

Question 10

PED Equation

Answer 10

(Δ% in quantity demanded)/(Δ% in price)

Question 11

PES Definition

Answer 11

A measure of the responsiveness of supply to a change in price (always positive).

Question 12

PES Equation

Answer 12

(%Δ Quantity Supplied)/(%Δ Price)

Question 13

Inelastic Supply

Answer 13

Supply doesn’t respond much to changes in price.

Question 14

Elastic Supply

Answer 14

Changes in price result in large changes in supply.

Question 15

Perfectly Inelastic Supply

Answer 15

PES=0. No response to a change in price. Vertical Supply Curve.

Question 16

Inelastic Supply

Answer 16

PES between 0 and 1. Less than proportionate increase in supply to a change in price. Steep curve.

Question 17

Unitary Supply

Answer 17

PES=1. Percentage change in supply= percentage change in price.

Question 18

Elastic Supply

Answer 18

PES between 1 and +infinity. More than proportionate change in supply to change in price.

Question 19

Perfectly elastic supply

Answer 19

Producers will supply any amount at a given price. Horizontal supply curve.

Question 20

Factors affecting PES

Answer 20

TRIBES. Time, Resources available, inventory levels (can goods be stored?- perishability), barriers to entry, ease of factor substitution, spare capacity.

Question 21

Income elasticity of supply

Answer 21

The responsiveness of demand to a change in income.

Question 22

YED equation

Answer 22

(%Δ in quantity demanded)/(%Δ in consumer income)

Question 23

Normal Goods

Answer 23

When income increases, demand rises. YED >0

Question 24

Inferior Goods

Answer 24

When income increases, demand falls, YED<0

Question 25

Luxury Goods

Answer 25

PED greater than one. Income elastic.

Question 26

Necessities

Answer 26

YED less than one. Income inelastic.