Elasticity

Question 1

What must the midpoint value be to be elastic?

Answer 1

Greater than 1

Question 2

What must the midpoint value be to be inelastic?

Answer 2

Less than 1

Question 3

What must the midpoint value be to be unitary?

Answer 3

1 (45°/directly proportionate)

Question 4

How is elasticity of demand measured?

Answer 4

Ed = quantity change/average x price average/change

Question 5

Factors affecting price elasticity of demand

Answer 5

Substitute availability, luxuries over necessities, time, proportion of income spent

Question 6

How does substitute availability affect elasticity?

Answer 6

The greater number of substitutes, the greater the elasticity

Question 7

Who benefits from price inelasticity?

Answer 7

Producers and government (if taxed)

Question 8

Who benefits from price elasticity?

Answer 8

Consumers

Question 9

What makes a product price elastic?

Answer 9

Demand highly sensitive to small price changes

Question 10

What are the three ways of measuring elasticity?

Answer 10

Midpoint method, total revenue, income elasticity

Question 11

Midpoint method

Answer 11

Qd change/Q average x P average/P change

Question 12

Total revenue

Answer 12

TR = PxQ

Direct relationship is inelastic, inverse relationship is elastic

Question 13

Income elasticity

Answer 13

Ey = % Q change/% Y change

Question 14

Price Elasticity of Demand

Answer 14

Responsiveness of quantity demanded to a change in price

Question 15

Inferior good income elasticity

Answer 15

Negative, less than 0

Question 16

Normal good income elasticity

Answer 16

Positive, greater than 1

Question 17

How does availability of substitutes affect PED?

Answer 17

Easy to switch if price changes, options

Question 18

How does the necessity or luxury status of a good affect PED?

Answer 18

If we need it the price is inelastic, if it’s a luxury the price is elastic, addictions considered necessities by users → price inelastic

Question 19

How does proportion of income spent affect PED?

Answer 19

Expensive goods are elastic due to using high proportion of consumer’s income, e.g. 50% increase is greater for $1000 TV than $1 chocolate bar

Question 20

How does time affect PED?

Answer 20

Time to respond to price change is elastic, demand for commodities is inelastic because consumers don’t have time to adjust their consumption/find subs

Question 21

Price elasticity of supply

Answer 21

Responsiveness of quantity supplied to a price change

Question 22

Determinants of price elasticity of supply

Answer 22

Time, nature of industry

Question 23

How does time affect PES?

Answer 23

If producer responds quickly to change price is elastic, difficult to increase supply on short notice → supply tends to be inelastic, time increases supply elasticity,

Question 24

How does the nature of an industry affect PES?

Answer 24

Agriculture is inelastic because they can’t respond to demand quickly, manufactured goods are elastic because they can easily expand output