Elasticity of Demand and Supply

Question 1

what is elasticity?

Answer 1

a measure of responsiveness (sensitivity) of the quantity demanded of a good to a change in some variable.

Question 2

what is price elasticity ?

Answer 2

the change in quantity demanded of a good caused by a change in the price of a good itself.

Question 3

what is income elasticity?

Answer 3

the change in quantity demanded of a good caused gy a change in the consumers income

Question 4

what is cross elasticity?

Answer 4

the change in quantity demanded of a good caused by a change in the price of a substitute/ complementary good.

Question 5

the PED of a good is greater than 1

Answer 5

the good is elastic

can be minus or plus

Question 6

the PED of a good is exactly 1

Answer 6

the good is unit elastic / unitary

plus or minus

Question 7

the PED of a good is zero (0)

Answer 7

the good is perfectly inelastic

Question 8

the PED of a good is less then 1

Answer 8

the good is inelastic

can be minus or plus

Question 9

the PED of a good is infinity

Answer 9

the good is perfectly elastic

Question 10

when is a good relatively elastic ?

Answer 10

when the proportionate/percentage change in quantity demanded of a good is greater than the proportionate/ percentage change in the price of the good itself.

Question 11

when is a good perfectly elastic?

Answer 11

when any increase in the price of that good results in its quantity falling to zero

Question 12

when is a good said to be unitary elastic?

Answer 12

when the proportionate/percentage change in the quantity demanded of a good is equal to the proportionate/percentage change in the price of that good.

Question 13

when is a good relatively inelastic?

Answer 13

if the proportionate/ percentage change in quantity demanded of a good is less than the proportionate/ percentage change in price of that good.

Question 14

when is a good perfectly inelastic?

Answer 14

if the proportionate / percentage change in the price of a good causes no change in the quantity demanded of that good.

Question 15

what happens to the Total Revenue (TR) if the PED is greater than 1

Answer 15

elastic…

TR will move in the opposite direction to the price change

Question 16

what happens to the TR if the PED is less than 1

Answer 16

inelastic…

TR will move in the same direction as the price change

Question 17

what happens to the TR if the PED is 1

Answer 17

unitary elastic…

TR will not change no matter what direction the price changes

Question 18

Formula of PED

Answer 18

changeQ / changeP * P1 + p2 / Q1 + Q2

Question 19

a negative PED

Answer 19

depicts a normal good that obeys the Law of Demand.

Question 20

a positive PED

Answer 20

depicts a good that does not obey the law of demand (e.g. given good, inferior good,…)

Question 21

what factors can affect the PED of a good

Answer 21

availability of close substitutes,
complementary goods,
proportion of income spent on it,
durability
expectations
brand loyalty 
alternative uses of a good

Question 22

why is it important to understand elasticity ?

Answer 22

TAXATION: if demand is inelastic, taxes may be increased and TR increases

BUSINESSPEOPLE: if the demand is elastic, lowering the prices will increase sales and TR

INTERNATIONAL TRADE: how are imports and exports affected

Question 23

what are substitute goods of CED

Answer 23

goods that satisfy the same needs and act as alternatives to each other.
There is a positive relationship between price of good A and quantity of good B

e.g. Dif. cereals, teas,…

Question 24

what are complementary goods of CED

Answer 24

goods that are interrelated snd should be used in conjunction with each other.
there is a negative relationship between price of good A and quantity of good B.

e.g.cars + petrol, cereal + milk

Question 25

what is the closest substitute to a good?

Answer 25

negative relationship ( - )
& the bigger number

Question 26

formula of CED

Answer 26

changeQa / changeQb * P1b + P2b / Q1a + Q2a

Question 27

formula of YED

Answer 27

changeQ / change Y * Y1 + Y2 / Q1 + Q2

Question 28

a positiv YED result

Answer 28

a normal good
(more will be bought as income increases)

NECESSITY = between 0 and 1
LUXURY = bidder than 1

Question 29

a negativ YED result

Answer 29

an inferior good

less will be bought as income increases

Question 30

a good with zero YED

Answer 30

goods that people purchase when their income is low. They do not purchase additional quantities of these goods when their income increases
e.g. salt

Question 31

The PED values of 3 dif. goods are
A= -2.5 B= -1.0 C= -0.5

how can you maximize revenue for those goods?

Answer 31

The price of good A should be decreased to maximize sales.
The Price of good B should be left as it is, since a change wouldn’t make any difference in revenue.
The Price of C should be increased, since consumers would still buy it and your TR increases.