elasticity

Question 1

what is elasticity?

Answer 1

Elasticity is a measure of the proportionate change in a dependent variable given a proportionate change in an independent variable

Question 2

what is own price elasticity of demand>?

Answer 2

the percentage cahnge in quantity demanded as a response to a percentage change in price

Question 3

what is the equation of own price elasticity of demand?

Answer 3

(Px X change in Dx)/(Qx X change in Px)

Question 4

what is the formula for own price elasticity of demand when the price change is very small ( change in P tends to 0)?

Answer 4

(Px/Qx) X [d(Qx)/d(Px)]

Question 5

what is the range for which own price elasticity of demand is elastic

Answer 5

if the |Ed| is greater than 1

Question 6

what is the range for which own price elasticity of demand is inelastic

Answer 6

if the |Ed| is less then one

Question 7

what is the range for which own price elasticity of demand is unit elastic

Answer 7

the |Ed| is equal to 1

Question 8

how does the price elasticity of demand vary over a linear demand curve?

Answer 8

when the price is above the equillibrium price, the own price elasticity of demand is elastic with at the Y axis, it being equal to infinity. when the price is at the equilibrium price it is unit elastic. when the price is below the elasticity is inelastic with it being zero at the x axis

Question 9

what does it mean to have perfectly inelastic demand?

Answer 9

quantity demanded does not change in response to a change in price.

Question 10

what does it mean to have perfectly elastic demand?

Answer 10

quantity demanded is infinitely responsive to any change in the price, even a small one.

Question 11

what are the factors that determine the price elasticity of demand

Answer 11

Availability of substitutes (Many substitutes: demand is price elastic, Few substitutes: demand is price inelastic)
Time (long- and short-run elasticities may be different)
Advertising- This may make demand more inelastic
Type of product (Essential goods
Luxury goods - purchase can be put off )
Price of product in relation to income (The greater the % of income the good costs the more price elastic the good will be.)
Durability of the good

Question 12

what is the cross price elasticity of demand?

Answer 12

The responsiveness of quantity demanded of one good to a change in the price of a different
good

Question 13

what is the formula for the cross price elasticity of demand?

Answer 13

percentage change of quantity demanded of X / percentage change in the price of Y

Question 14

what is the cross price elasticity of demand when the goods are substitutes?

Answer 14

Cross price elasticity is likely to be positive if the goods are substitutes: e.g. Tea and coffee

Question 15

what is the cross price elasticity of demand when the goods are complements?

Answer 15

Cross price elasticity is likely to be negative if two goods are complements e.g. Fish and chips.

Question 16

what is the income elasticity of demand?

Answer 16

the responsiveness of the quantity demanded of a good to a change in the income

Question 17

what is the formula for the income elasticity of demand?

Answer 17

percentage change in quantity demanded/ percentage in income

Question 18

what is the income elasticity of demand for an inferior good?

Answer 18

the income elasticity of demand for an inferior good is negative so as income rises, consumers demand less of a good

Question 19

what is the income elasticity of demand for a normal good?

Answer 19

a normal good has a postive income elasticity of demand

Question 20

what is the income elasticity of demand for a necessity?

Answer 20

the income elasticity of demand for a necessity is between 0 and 1

Question 21

what is the income elasticity of demand for a luxury good?

Answer 21

a luxury good has an income elasticity of demand of greater than 1

Question 22

what are the factors that influence the income elasticity of demand?

Answer 22

the level of income - people on lower income levels will experience higher percentage change in incomes than those on higher income for any given change
product perception - some goods have snob appeal as income grows such as cars or watches
lifestyle changes - increases in incomes may be associated with less time so increase in demand for ready meals or eating out
the economic climate -a decrease in consumer confidence may affect an individuals consumption pattern

Question 23

what is the price elasticity of supply?

Answer 23

Percentage change in quantity supplied of as a response to a percentage change in price