Elasticity (2.2 and 2.4)

Question 1

Define elasticity.

Answer 1

The proportionate responsiveness of a second variable to an initial change in the first variable.

Question 2

If price increases by 5% and demand decreases by 5%, what is this type of elasticity?

Answer 2

Unit elasticity of demand.

Question 3

If price increases 5% and demand decreases less than 5%, what is this type of elasticity?

Answer 3

Inelastic demand.

Question 4

How to calculate PED

Answer 4

%change quanitity demanded / % change in price

Question 5

How to calculate Income elasticity of demand YED

Answer 5

%change quanity demand / %change income

Question 6

How to calculate XED?

Answer 6

%change quanitity A demand / % change price B

Question 7

Draw Perfectly elastic demand.

Answer 7

Check

Question 8

Draw elastic demand.

Answer 8

Check

Question 9

Draw Unit elasticity of demand.

Answer 9

Check

Question 10

Draw inelasticity of demand.

Answer 10

Check

Question 11

Draw complete inelastic demand.

Answer 11

Check

Question 12

What is the definition of PED?

Answer 12

Measures the extent to which the demand for a good changes in response to a change in the price of that good.

Question 13

What are factors affecting PED? (5)

Answer 13

• Substituability
• % income spent
• Necessities or luxuries
• ‘Width’ of the market
• Time

Question 14

What can the change in price do to revenue?

Answer 14

Increase, non change or decrease.

Question 15

What happens to the revenue if percentage increase in price is lower than the fall in demand?

Answer 15

Total revenue will decrease.

Question 16

What is the definition of YED?

Answer 16

Measures the extent to which the demand for a good changes in response to a change in income.

Question 17

Is income elasticity positive or negative for normal goods?

Answer 17

positive.

Question 18

What are normal good diveded into and what is their elasticity?

Answer 18

Basic goods between 0 and 1
Superior goods greater than 1

Question 19

What determinds how a demand curve shifts?

Answer 19

Size and sign.

Question 20

What is the definition of XED?

Answer 20

Measures the extent to which a demand for a good changes in response to a change in the price of another good.

Question 21

A decrease in price of one good causes…? (complimentary and substitute goods)

Answer 21

Complimentary demand to increase, substitute demand decrease.

Question 22

Most relationships in XED are..?

Answer 22

Inelastic.

Question 23

What is the definition of Price elasticity of supply?

Answer 23

Measures the extent to which the supply of a good changes in response to a change in the price of that good.

Question 24

What is the formula for price elasticity of supply?

Answer 24

= % change supplies / % change price

Question 25

Draw perfectly elastic supply

Answer 25

Check

Question 26

Draw elastic supply

Answer 26

Check

Question 27

Draw unit elasticity of supply

Answer 27

Check

Question 28

Draw inelastic supply

Answer 28

Check

Question 29

Draw completely inelastic supply

Answer 29

Check

Question 30

If the S curve intersects the x axis what does that mean?

Answer 30

All points on curve is inelastic

Question 31

If the s curve goes the the origion what does that mean?

Answer 31

Equals unity.

Question 32

List factors effects PES (6)

Answer 32

- Availability of spare capacity - Ease of accumilating stock - Ability to change to different production - Time taken for production - Number of firms in market - Time

Question 33

Explain and list 3 phases of time.

Answer 33

1. Market period supply - Inelastic, price increase 2. Short run supply - quantity increase price decrease 3. Long run supply - Increase FOP output increase price decrease

Question 34

If supply is inelastic and the demand curve shifts rightward, what changes?

Answer 34

Price increases more than quantity.