External environment

Question 1

Price elasticity of demand (PED)

Answer 1

%Change in quantity demanded/ %Change is price

PED < 1 = inelastic
PED > 1 = elastic
PED = 1 = unit elasticity

ignore minus sign

Question 2

Giffen good

Answer 2

• demand increases as the price increases (non - luxury products targeting low income customers)

Question 3

Veblen goods

Answer 3

• demand increases as the price increases (high quality status related)

Question 4

Inferior good

Answer 4

• increase in income will decrease demand

Question 5

Income elasticity

Answer 5

%Change in quantity demanded/ %Change in household incomes

Income elastic > 1
Income inelastic 0 < x < 1

Question 6

Cross elasticity of demand

Answer 6

%Change in quantity of good A demanded/ %Change in price of good B

substitutes = +
complements = -
unrelated = 0

Question 7

Price elasticity of supply (PES)

Answer 7

%Change in quantity supplied/ %Change in price