Elasticity (theme 1)

Question 1

Define price elasticity of demand.

Answer 1

The responsiveness of demand to a change in price

Question 2

What is the price elasticity of demand formula? (Short or long)

Answer 2

Ped = % change in quantity demanded / % change in price.

Question 3

Where % change in demand is greater than % change in price, what does that mean?

Answer 3

Elastic (figure greater than 1)

Question 4

Where % change in demand is less than the % change in price, what is this?

Answer 4

Inelastic ( figure less than 1)

Question 5

What does a value of 1 mean (price elasticity)

Answer 5

Unit elastic (% change quantity demanded and the % change in price are the same)

Question 6

What does a value of 0 mean ( price elasticity)

Answer 6

Perfectly inelastic (% change in quantity demanded stays the same no matter the % change in price)

Question 7

What is the effect on total revenue of an elastic product

Answer 7

= increasing price will reduce the total revenue

= decreasing price, increases total revenue

Question 8

What is the effect on total revenue of an inelastic product

Answer 8

= Increasing price, increases total revenue

= decreasing price, reduces total revenue

Question 9

What determines the elasticity of demand?

Answer 9

Time period = longer the time under consideration more elastic a good is likely to be.

Number of closeness to substitutes = greater number of subs means more elastic a product,

The proportion of income = how much is taken up by the product, the smaller the proportion the more inelastic

Luxury or necessity = holiday is a luxury, food is a necessity

Habit forming = drugs, alcohol

Question 10

Define price elasticity of supply

Answer 10

The responsiveness of supply to a change in price

Question 11

What is the equation for price elasticity of supply?

Answer 11

Pes = % change in quantity supplied / % change in price (answer is always pos)

Question 12

% change in quantity supplied is greater than the change in price, what does this mean?

Answer 12

Elastic, ( value of greater than 1)

Question 13

% change quantity supplied is less than % change in price, what does this mean?

Answer 13

Inelastic, (value of less than 1)

Question 14

% change in quantity supplied is equal to % change in price, what does this mean?

Answer 14

Unitary elastic, (equal to 1)

Question 15

What are the determinants of elasticity of supply?

Answer 15

The availability of the 4 factors of production:

1. Land
2. Labour
3. Capital
4. Enterprise

• spare capacity
• spare stock

Question 16

What is the equation for income elasticity of demand

Answer 16

Yed = % change in quantity demanded / % change in income

Question 17

Define income elasticity of demand

Answer 17

The responsiveness of demand to changes in income

Question 18

What is an inferior good?

Answer 18

• Demand falls as income rises an visa versa
• has a negative value

Question 19

What is a normal good?

Answer 19

• Demand rises as income rises and vice versa
• has a positive value

Question 20

What is something with a value greater than +1 and +2?

Answer 20

A luxury good

Question 21

Define cross elasticity of demand

Answer 21

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

Question 22

What value do you get when goods are substitutes

Answer 22

Positive value

Question 23

What value do you get when goods are compliments

Answer 23

A negative value

Question 24

What is the cross elasticity saying?

Answer 24

Bigger the value = closer the substitute

Or

Bigger the value = closer the complimentary value

Question 25

What is the price elasticity equation?

Answer 25

Xed = % change in quantity demanded of good a / % change in price of good b