Elasticity

Question 1

what is elasticity

Answer 1

a measure of responsiveness of quantity demanded or supplied to a price change

Question 2

define inelastic

Answer 2

quantity demand or supplied responds weakly to price change - percentage change in quantity > percentage change in price (Ed/Es < 1)

Question 3

inelastic - how does the substitution effect inelastic goods and examples

Answer 3

inelastic goods have minimal substitutes EG beer, wine, spirits, petrol, milk

Question 4

what does perfectly inelastic mean (draw for supply and demand)

Answer 4

Ed/Es = 0 (vertical)

Question 5

define elastic

Answer 5

quantity demand/supplied responds strongly to price change (percentage change in quantity > percentage change in price Ed/Es > 1)

Question 6

elastic - how does the substitution effect elastic goods and examples

Answer 6

many close substitutes to swap too if price too high EG juice, fast foods

Question 7

what is perfectly elastic draw on graph

Answer 7

Ed/Es = infinity

the good has a perfect substitute

Question 8

how do calculate price elasticity of demand or supply

Answer 8

change in Q P
——————- x ————-
Q change in P

Question 9

Total Revenue (Total Expenditure) =

Answer 9

P x Q (maxmised at midpoint Ed/Es = 1)

Question 10

what happens if price increases and demand is

1. ELASTIC
2. INELASTIC

Answer 10

elastic: TR falls - percentage decreases in Qd > price increase
inelastic: TR rises - fall in Qd < Price increases

Question 11

what is the formula for income elasticity of demand and what is it

Answer 11

Ey = % change Q
———————
% change in Y

responsiveness of demand to a change in customer income

Question 12

describe a normal good using an elastic example and an inelastic example

Answer 12

positive income ealsticity (Ey >0)
as income rises, demand decrease
elastic - luxury goods
inelastic - necessities

Question 13

describe an inferior good using an example

Answer 13

neg income elasticity (Ey<0)
as income rises demand decreases
homebrand

Question 14

briefly describe the determinants of demand elasticity

Answer 14

1. availability of substitutes (more substitutes = more elastic)
2. type of good (necessity inelastic, luxury elastic)
3. definition of market (broadly defined inelastic = petrol, narrowly defined elastic = BP)
4. proportion of income spent (expensive = elastic, cheap = inelastic)
5. time (time to respond to change = elastic, short run price change = inelastic)

Question 15

what is the formula for cross elasticity of demand

Answer 15

Eab = % change in Qa
————————
% change in Pb

Question 16

what is cross elasticity of demand and explain a substutue and compliment

Answer 16

measure of how demand for good A changes price of related good B
substitute - pos cross elasticity (P/Q move same)
compliment - neg cross elasticity

Question 17

what are the 3 key determinants of elasticity of supply

Answer 17

1. time (respond quick = elastic)
2. nature of industry (agri products = inelastic, manufacturing products = elastic)
3. ability to store inventory (can store = elastic)