Elasticity

Question 1

How do you calculate percentage change

Answer 1

New - original / original x 100

Question 2

Does PED stay the same along a demand curve

Answer 2

No (as long as it’s downwards sloping)

Question 3

PED formula

Answer 3

%change Qd / % change price

Question 4

What does it mean for elasticity to be >1

Answer 4

Elastic

Question 5

What does it mean when elasticity is <1

Answer 5

Inelastic

Question 6

How does PED influence firms decision making

Answer 6

If a good is price elastic, they make more revenue from decreasing price. (However might not be profitable)

Question 7

When is revenue maximised

Answer 7

When PED is unitary (-1)

Question 8

What factors determine PED

Answer 8

S - substitutes
P - Percentage of income
L - Luxury or necessity
A - Addictive nature
T - Time period

Question 9

YED formula

Answer 9

% change Qd / % change in income

Question 10

Positive YED either means

Answer 10

Normal necessity good (<1)
Normal luxury good (>1)

Question 11

XED formula

Answer 11

% change Qd for good x / % change price of good y

Question 12

What happens as XED is further away from zero

Answer 12

The stronger the relationship between the goods

Question 13

Positive vs negative XED

Answer 13

Positive means substitute
Negative means complement

Question 14

PES formula

Answer 14

% change Qs / % change Price

Question 15

Factors affecting PES

Answer 15

P - Production lag
S - Stocks
S - Spare capacity
S - Substitutability of FOP
T - Time period

Question 16

How do firms make decisions based on their PES

Answer 16

If they know there is going to be a recession/boom they can change their PES.
If a boom is coming, firms will want to be more responsive to a change in price, so will want elastic PES and thus may stockpile, decrease production lag etc