Elasticity Concepts

Question 1

Price elasticity of demand

Answer 1

Measures the degree of responsiveness of quantity demanded of a good to a change in its own price, ceteris paribus

Question 2

Numerical values PED

Answer 2

PED>1 price elastic

PED<1 price inelastic

Question 3

Determinants of PED

Answer 3

SNIT

Substitute availability
Necessity (degree of)
Income (proportion of)
Time period (to change consumption patterns)

Question 4

Price elasticity of supply

Answer 4

Measures the degree of responsiveness of quantity supplied of a good to a change in its own price, ceteris paribus

Question 5

Numerical values of PES

Answer 5

same as PED

Question 6

Determinants of PES

Answer 6

SNIT
Spare capacity (labour and raw material)
Nature of production (factor mobility & length of production process)
Inventory (ease of accumulating)
Time period (LR producers can rectify supply bottlenecks)

Question 7

Income elasticity of demand

Answer 7

Measures the degree of responsiveness of demand for a good to a change in consumer’s income, ceteris paribus

Question 8

Determinants of YED

Answer 8

1. Degree of necessity

2. Level of income

Question 9

Numerical values of YED

Answer 9

Necessity: +ve and low (<1)
Luxury: positive and high
Inferior: negative

Question 10

Cross elasticity of demand

Answer 10

Measures the degree of responsiveness of demand of a good to a change in price of another good, ceteris paribus

Question 11

Values of CED

Answer 11

Positive: substitutes
Negative: complements

Magnitude depends on strength of substitute/complement