Elasticity (L12)

Question 1

Price elasticity of demand

Answer 1

Measures the responsiveness of demand given a change in price

Question 2

When is demand price elastic?

Answer 2

When a change in price causes a proportionately larger change in demand.

Question 3

When is demand price in elastic

Answer 3

When a change in price causes a proportionately smaller change in demand

Question 4

Number of substitutes

Answer 4

The more substitutes a product has, the greater the degree of consumer switching will be when there is a price change (more substitutes more elastic demand that a product has)

Question 5

Necessity/luxury

Answer 5

If a product is considered a necessity demand is more likely to be price inelastic as people require the product no matter what the price is.

Question 6

Addictive ness

Answer 6

The more addictive a product is the more price inelastic demand will be

Question 7

Time

Answer 7

Time gives consumers the opportunity to find alternatives. Greater time period= more price elastic demand is

Question 8

Proportion of income spent on the product

Answer 8

The greater the proportion of income spent on the product the less able consumers will be to afford any price increases so the greater the proportion of income spent on a product the more price elastic demand will be

Question 9

Problem: assumptions about the behaviour of economic agents must be made to create economic models. What assumptions should economists make?

Answer 9

Solution: assumptions can be made with deduction (classical, neoclassical) or induction (behavioural,Keynesian school) collect evidence

Question 10

Classical and neoclassical economics, decision makers are…

Answer 10

Assumed to be rational

Question 11

Price inelastic

Answer 11

Demand doesn’t change as much even if prices increase, because supply doesn’t increase

Question 12

Price elasticity of demand

Answer 12

Percentage change in quantity demand / percentage change in price

Question 13

Elastic

Answer 13

1

Question 14

Inelastic

Answer 14

0

Question 15

Unitary

Answer 15

1

Question 16

Perfectly

Answer 16

0

Question 17

Price elasticity of supply

Answer 17

Measures the responsiveness of supply given a change in price

Question 18

Supply is price elastic when

Answer 18

A change in price causes a proportionately larger change in supply.

Question 19

If a change in price causes a proportionately smaller change in supply it’s…

Answer 19

Price inelastic

Question 20

The greater the amount of time required to produce the product…

Answer 20

The more price inelastic supply will be so firms can respond to price changes rapidly.

Question 21

Greater spare capacity

Answer 21

More price elasticity as there are factors of production available to be used in production. Price rise, they’d respond w increase in production

Question 22

More finished goods available

Answer 22

More price elasticity as firms will be able to respond to a price rise by releasing some/all stocks onto the market straight away.

Question 23

More time

Answer 23

Gives firms the opportunity to expand or reduce production

Question 24

If the product is more perishable

Answer 24

The harder it is to build up stocks of it, the more price inelastic it is

Question 25

Price elasticity of supply

Answer 25

Percentage change in quantity supplied/ percentage change in price

Question 26

Direct tax

Answer 26

Tax levied directly on an individual or organisation

Question 27

Indirect tax

Answer 27

Levied on good/service

Question 28

A specific tax causes a shift

Answer 28

Parallel in supply curve. It’s the same amount at all prices eg fuel and beer duty

Question 29

Ad Valorem

Answer 29

Non parallel shift in supply curve, tax increases as the amount sold rises eg VAT

Question 30

PED factors

Answer 30

time period 
no of substitutes
addictiveness 
luxury 
proportion of income spent

Question 31

PES factors

Answer 31

time period 
production time 
no of finished goods 
spare capacity 
perishability