Elasticity And Inelasticity

Question 1

How do you calculate cross elasticity of demand?

Answer 1

XED = % change in QD of good A / % change in P of good B

Question 2

Definition of cross elasticity of demand

Answer 2

The responsiveness of demand of one good to changes in the price of a related good

Question 3

Do complimentary goods have + or - values?

Answer 3

-

Question 4

Do substitute goods have + or - values?

Answer 4

+ and the higher the value the closer they are to

Question 5

How do you calculate income elasticity of demand?

Answer 5

YED = % change in QD / % change in Y

Question 6

Definition of income elasticity of demand

Answer 6

The responsiveness of demand to changes in incomes.

Question 7

Normal good

Answer 7

Demand rises as income rises
+ value

Question 8

Inferior good

Answer 8

Demand falls as income rises
- value

Question 9

Luxury good

Answer 9

Value of +1

Question 10

Determinants of elasticity of supply

Answer 10

The availability of the 4 factors of production
- Land = availability of raw materials
- labour = training and skill of employees
- capital = the availability and ability to access technology
- enterprise = the skill of our entrepreneurs and managers
Time
Spare capacity
Spare stock and components

Question 11

Definition of price elasticity of supply

Answer 11

The responsiveness of supply to changes in price

Question 12

How do you calculate price elasticity of supply?

Answer 12

PES = % change of QS / % change in P

Question 13

Is price elasticity of supply negative or positive?

Answer 13

Positive

Question 14

Determinants of elasticity of demand

Answer 14

• time period = the longer the time under consideration, the more elastic a good is likely to be
• number and closeness of substitutes = the greater the number of substitutes, the more elastic
• proportion of income = the smaller the proportion taken up by the product, the more inelastic
• luxury or necessity = holidays are a luxury but food is a necessity
• habit forming = eg. Addictive drugs

Question 15

= infinite : perfectly elastic

Answer 15

• % change in QD drops off completely if any change in P
• graph with a straight horizontal line

Question 16

= 1 unitary elastic

Answer 16

• % change in QD = % change in P
• supply curve at same rate = normal diagonal line

Question 17

0 perfectly inelastic

Answer 17

• % change in QD stays the same no matter what change in P
• demand curve is a straight vertical line

Question 18

What does the graph of Inelasticity look like?

Answer 18

Supply curve is more vertical

Question 19

Definition of price elasticity of demand

Answer 19

The responsiveness of demand to changes in price

Question 20

How do you calculate PED?

Answer 20

PED = % change in QD / % change in P

Question 21

Is PED - or + ?

Answer 21

Always -

Question 22

What does the graph of elasticity look like?

Answer 22

The supply curve is more horizontal

Question 23

If demand price is elastic:

Answer 23

• increase in P = decrease in TR ( % change in QD > % change in P )
• decrease in P = increase in TR ( % change in QD > % change in P )

Question 24

If demand price is inelastic:

Answer 24

• increase in P = increase in TR ( % change in QD < % change in P )
• decrease in P = decrease in TR ( % change in QD < % change in P )