Elasticity

Question 1

Define PED.

Answer 1

Price Elasticity of demand is a measure of the sensitivity of Qd to a change in the price.
When the price rises, Qd falls for almost any good, but the degree by how much it falls is different according to its elasticity.

To calculate PED, we use the following formula: PED = percentage change in quantity demanded/percentage change in price.

Or using point elasticity:
PED = change in Q/change in P x P1/Q1

Question 2

Why is PED negative?

Answer 2

The PED is negative for all levels of output because of the negative relationship between price and quantity demanded.
This is in accordance with the Law of Demand - the Qd of a commodity will fall as the price rises, and vice versa, ceteris paribus.

Question 3

What is a price floor?

Answer 3

A price floor is a minimum price that sellers must charge on their product. It is set above the equilibrium price. It is made to protect the suppliers - so they can earn reasonable earnings (for example: agricultural products).

It creates a surplus of goods.

Question 4

What is a price ceiling?

Answer 4

It is a maximum price that is set below the equilibrium price. It is set to protect the buyer - so more people can buy the product, however, it creates a shortage of goods.

Question 5

What are the determinants of PED?

Answer 5

1. Availability of Close Substitutes
2. Necessities and Luxuries
3. Habit-Forming Goods
4. Proportion of Income spent on Commodity
5. Possibility of Postponing Purchases.

Question 6

Why is the PED Relevant?

Answer 6

1. Firms (prices to maximise profits)
2. Governments (to maximise Tax Revenue)
3. Trade Unions (to maximise wages earned)

Question 7

What are the determinants of PES?

Answer 7

1. The time period (long run/short run)
2. Length of production period
3. Degree of spare productive capacity
4. Level of stocks
5. Factor mobility
6. The ease and cost of factor substitution.
7. Employment
8. Certainty
9. Barriers to entry

Question 8

What are the determinants of YED?

Answer 8

1. Necessity/Luxury (Quality of the Good)
2. Level of Disposable Income
3. Country’s Standard of Living
4. Rate of Satiety

Question 9

If supply is inelastic who has to pay most of the tax?

Answer 9

The suppliers as they have less bargaining power.