Elasticity

Question 1

Income elasticity of demand

Answer 1

-Responsiveness of change in demand to a change in income
YED= %change in demand/
%change in income

-Inferior goods
-fall in demand as income increases
-own branded food
-YED<0

-Normal goods
-demand increases as income increase
-food, clothes
-YED>0

-Luxury goods
-demand increases a lot as income increases
-YED>1
-periods of prosperity cause firms to produce more luxury goods and less inferior goods

-Elastic - YED>1
-Inelastic- YED<1

Question 2

Price elasticity of supply

Answer 2

-Responsiveness of change in supply to a change in price
-PES= %change in supply/
%change in price

-Elastic- PES>1
-Inelastic PES<1

-perfectly inelastic- supply is fixed and PES=0
-perfectly elastic-supply can change at no additional cost PES=infinite

FACTORS AFFECTING
-Time- SR supply is inelastic however in LR supply can be increase
-Spare capacity- increase supply quickly-elastic
-Storage-can be stored means the good is a
elastic
-Factor mobility- more mobile means elastic as supply can be allocated where needed
-Barriers to entry- supply is price inelastic if barriers are high- difficult to enter and supply the market

Question 3

Price elasticity of demand

Answer 3

-Responsiveness of demand to a change in price
-Elastic=very responsive PED>1
Inelastic=not very responsive PED<1

FACTORS
-necessity- inelastic
-substitutes- more=elastic
-Addictiveness- inelastic
-Price as proportion of income - low=inelastic
-Durability- elastic-wait longer to replace
-peak times- inelastic

Question 4

Cross price elasticity of demand

Answer 4

-Responsiveness of change in demand to change in price of another good

-Complements XED<0
-Demand for the good fall if there is an increase in price in the other good
-close complements- small increase in price causes large decrease in demand of Y
-weak complements-large increase of X = small decrease in demand of Y

-unrelated goods- XED=0

Question 5

PED and total/tax revenue

Answer 5

• TR= price x quantity sold
  -inelastic= total revenue increases, burden of a tax will fall onto consumers
  -elastic=tr decreases, firms take burden of a tax upon themselves