Elasticity

Question 1

Define elasticity

Answer 1

Elasticity measures the extent to which buyers and sellers (S and D) respond to changes in the market

Question 2

What are the four types of elasticity and what do they show?

Answer 2

• Price ED: How elastic demand is in relation to price
• Income ED: How much a change in income effects the demand for a product
• Cross ED: How elastic the relationship between two goods is and whether they are subsidies or substitutes or neither.
• Price ES: Determines how elastic the supply.

Question 3

What is the equation for PED and what do the possible outcomes

Answer 3

Change in DEMAND -If PED > 1 demand is elastic
——————————- - If PED = 1 unit elasticiy
Change in PRICE - PED < 1 Demand is inelastic

Question 4

What determines whether Demand is inelastic/elastic

Answer 4

• The availability of substitutes
• Proportion of income spent on the products
• The time period considered

Question 5

What is the equation for YED and what do the possible outcomes mean

Answer 5

Change in DEMAND - + = Normal good
—————————— - NEG = Inferior good
Change in INCOME - Bigger the number the greater
change in demand
- High positive YED are superior
goods

Question 6

What is the equation for XED and what do the possible outcomes mean

Answer 6

change in DEMAND of one good - + goods are
————————————————– substitutes
change in PRICE of another good - NEG MEANS GOODS
COMPLEMENTS
-Bigger the number
closer the relationship

Question 7

What is the equation for PES and what do the possible outcomes mean

Answer 7

Change in SUPPLY
---------------------------------
Change in Price
- >1 S is elastic
- =1 unitary elasticity of supply
- <1 S is inelastic

Question 8

What determines whether Supply is inelastic or elastic

Answer 8

-The level of stocks available
-The ease at which production can be increased
Time period considered