Elasticity

Question 1

What is the definition of price elasticity of demand (PED)?

Answer 1

PED measures the responsiveness of quantity demanded to a change in the price of a good or service.

Question 2

What is the PED formula?

Answer 2

PED= %change in quantity demanded/ %change in price

Question 3

How do you calculate PED using %changes?

Answer 3

PED = %change in quantity demanded/ %change in price

Question 4

How can diagrams show price elastic and inelastic demand?

Answer 4

Elastic: A flatter demand curve indicated high responsiveness.
Inelastic: A steeper demand curve indicates low responsiveness.

Question 5

What do the numerical values of PED indicate?

Answer 5

Perfect price inelasticity (PED = 0): Quantity demanded does not change with price.
Price inelasticity (0 < PED < 1): Quantity demanded changes less than proportionally to price.
Unitary elasticity (PED = 1): Quantity demanded changes proportionally to price.
Price elasticity (PED > 1): Quantity demanded changes more than proportionally to price.
Perfect price elasticity (PED = ∞): Demand is infinitely responsive to price changes.

Question 6

What factors influence PED?

Answer 6

Availability of substitutes: More substitutes → higher elasticity.
Degree of necessity: Necessities are inelastic; luxuries are elastic.
Percentage of income spent: Higher percentage → higher elasticity.
Time: Longer time frames allow consumers to adjust, increasing elasticity.

Question 7

How does PED relate to total revenue?

Answer 7

Price elastic demand (PED > 1): Price increase → revenue decreases; price decrease → revenue increases.
Price inelastic demand (PED < 1): Price increase → revenue increases; price decrease → revenue decreases.
Unitary elasticity (PED = 1):Total revenue remains unchanged.

Question 8

What is the definition of price elasticity of supply (PES)?

Answer 8

PES measures the responsiveness of quantity supplied to a change in the price of a good or service.

Question 9

What is the formula for PES?

Answer 9

PES= %change in quantity supplied/ %change in price

Question 10

How can diagrams show price elastic and inelastic supply?

Answer 10

Price elastic supply: A flatter supply curve shows high responsiveness.
Price inelastic supply: A steeper supply curve shows low responsiveness.

Question 11

What do the numerical values of PES indicate?

Answer 11

Perfect price inelasticity (PES = 0): Supply is fixed and does not change with price.
Price inelasticity (0 < PES < 1): Supply changes less than proportionally to price.
Unitary elasticity (PES = 1): Supply changes proportionally to price.
Price elasticity (PES > 1): Supply changes more than proportionally to price.
Perfect price elasticity (PES = ∞): Supply is infinitely responsive to price changes.

Question 12

What factors influence PES?

Answer 12

Factors of production: Availability and mobility of resources.
Availability of stocks: More stocks → higher elasticity.
Spare capacity: Excess capacity increases elasticity.
Time:Longer time frames allow greater supply adjustments.

Question 13

How does PES values differ for manufactures and primary products?

Answer 13

Manufactured products: Higher PES due to easier production adjustments.
Primary products: Lower PES due to time constraints and dependency on natural factors.

Question 14

What is the definition of income elasticity of demand (YED)

Answer 14

YED measures the responsiveness of quantity demanded to changes in consumer income.

Question 15

What is the formula of YED?

Answer 15

YED= %change in quantity demanded/ %change in income

Question 16

What do YED numerical values indicate?

Answer 16

Luxury goods (YED > 1): Demand increases more than proportionally to income.
Normal goods (0 < YED ≤ 1): Demand increases proportionally or less than proportionally to income.
Inferior goods (YED < 0): Demand decreases as income rises.

Question 17

Why are PED, PES and YED important to businesses and governments?

Answer 17

Businesses:
* Set prices to maximize revenue based on PED.
* Plan production based on PES.
* Predict demand changes from income shifts using YED.

Governments:
* Assess the impact of indirect taxes and subsidies on demand (PED).
* Predict tax revenue changes from income changes (YED).
* Plan policies for supply stability (PES).