Elasticity (State Papers)

Question 1

Explain the term ‘income elasticity of demand’

Answer 1

This measures the percentage/proportionate change in the quantity demanded of a good caused by the percentage/proportionate change in the consumers income.

Question 2

Would petrol be an elastic or inelastic good?

Answer 2

Answer = Inelastic
Reason: Petrol has price inelastic demand as if price increases; the percentage increase in price will be greater than the percentage decrease in quantity demanded. Petrol is a necessity for many motorists and if price rises demand will fall by a lower proportion/percentage.

Question 3

Outline two reasons why it is important for retailers to understand the concept of price elasticity of demand

Answer 3

Reason 1: They will know by how much quantity demanded will change if the price of the product is changed.

Reason 2: They will know how to maximise revenue - for goods with inelastic PED firms should increase price / for goods with elastic PED firms should decrease price.

Question 4

Explain the law of demand

Answer 4

The law of demand states that as the price of a good or service increases the quantity demanded of that good or service decreases, and vice versa.

Question 5

Explain the term ‘price elasticity of demand (PED)’

Answer 5

Price elasticity of demand refers to the responsiveness of quantity demanded to a change in the price of a good itself

Question 6

Outline four factors that affect the PED for a good or service, providing examples to support your answer

Answer 6

1. Brand Loyalty
   The more loyal customers are to a certain brand of product the more inelastic their demand will be to changes in the price of that good, e.g. some consumers are very loyal to the Apple brand and thus non responsive to changes in price.
2. Expectation of further price changes
   If the consumer expects the price to fall further in the future, the more inelastic their demand will be to current decreases in price. E.g. if house prices are falling but the consumer feels that prices haven’t bottomed out yet, they may wait for further decreases before purchasing.
3. Luxury or necessity
   If the good is a necessity its PED will be inelastic as consumers will not be responsive to changes in prices. If the good is a luxury good its PED will be elastic as consumers may be very responsive to price changes. E.g. consumers will be more responsive to changes in the price of doughnuts than changes in the price of bread.
4. Availability of close substitutes
   The more substitutes there are available for the product the more elastic its demand will be. The closer the substitute the greater the elasticity will be. E.g. butter and margarine.

Question 7

Outline the potential impact a fall in the value of sterling against the euro would have on the price UK consumers pay for Irish products

Answer 7

A fall in the value of sterling means that Irish goods will be more expensive in UK markets. UK consumers will have to pay more for Irish goods. Some sellers in the UK may choose to pass on the higher prices in order to keep market share.

Question 8

Explain the difference between a movement along a supply curve and a shift in a supply curve. Use appropriate diagrams

Answer 8

https://postimg.cc/TKHsWdpS

Question 9

Define the categories of PED: elastic, inelastic and unit elastic

Answer 9

Elastic Demand:
The percentage/proportionate change in the price of the good causes a greater than percentage / proportionate change in quantity demanded of the good.

Inelastic Demand:
The percentage / proportionate change in the price of the good causes a lesser percentage/proportionate change in the quantity demanded of the good.

Unitary Elastic Demand:
The percentage / proportionate change in the price of the good is equal to the percentage / proportionate change in the quantity demanded of the good.

Question 10

‘Inferior products have a negative YED’ -> explain this statement and state one example of an inferior product, giving a reason for your answer.

Answer 10

Explanation: As a consumer’s income decreases they will buy more of an inferior product.

Example: Low price cust of meat
Reason: As incomes decline the demand for lower price cuts of meat may increase as this is what consumers can afford.

Question 11

Explain the equi-marginal principle of consumer behaviour

Answer 11

Consumers will spend their incomes in such a way that the ratio of marginal utility to price is the same for all the goods consumed. They then enjoy maximum satisfaction.

Question 12

Define the term elasticity

Answer 12

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