Elasticity

Question 1

Define Elasticity of Demand

Answer 1

The responsiveness of quantity demanded to a change in the price of the good or service

Question 2

What does income elasticity of demand answer

Answer 2

if something is a normal or inferior good

Question 3

Price elasticity of supply formula

Answer 3

Q2 - Q1 
-----------
     Q1
-----------
P2 - P1
----------- 
    P1

Question 4

Define Price Elasticity

Answer 4

• The measure of the responsiveness or sensitivity of quantity to a change in price
• in other words, How much of a change in quantity would we likely see a given change in price.

Question 5

what does it mean when ‘E > 1’

Answer 5

demand is price elastic., buyers are sensitive to a price change. the law of demand is relatively strong

Question 6

what does it mean when ‘E < 1’

Answer 6

Demand is price inelastic, buyers are not sensitive to a price change, the law of demand is relatively weak

Question 7

What does It mean when Elasticity = 1

Answer 7

Perfectly elastic - price and quantity move at the same proportion

Question 8

Factors affecting PED

Answer 8

• Availability of substitutes
• luxury
• proportion to income spent
• time to respond to changes (longer time = more elastic)

Question 9

What is price discrimination

Answer 9

Different consumer groups have different PED.

- Producers need to use this information to efficiently price their products to boost total revenue

Question 10

define total revenue

Answer 10

• The total receipts from sales of a given quantity of goods and services

Question 11

What is the TR method

Answer 11

Prices x Quantity (PxQ)

• elastic: price and total revenue move in opposite directions. eg. price goes up = TR goes down
• inelastic: price and total revenue move in the same direction. eg. Price goes up TR goes up

Question 12

Income elasticity of demand (YED)

Answer 12

• shows the effect of a change in income on quantity demanded.
  % change in quantity demanded
  ———————————————-
  % change in income

Question 13

Positive elasticity of demand

Answer 13

the + sign means that the good is a normal good. the coefficient is >1. the demand for the good responds more to a change in income
- indicates the good is not a necessity, would be a luxury

Question 14

negative income elasticity of demand

Answer 14

(-) sign = inferior good

• coefficient less than one (E<1)
• relatively inelastic

Question 15

Why would firms use YED?

Answer 15

• Sales forecasting
• pricing policies
• diversification

Question 16

formula for PED

Answer 16

Q2 - Q1
------------
Q2 + Q1
-----------
     2
-----------
P2 - P1 
-----------
P2 + P1
-----------
     2

Question 17

Formula for percentage change

Answer 17

Same as PES but x100