IB Elasticity

Question 1

Define price elasticity of demand

Answer 1

responsiveness/sensitivity of quantity demanded of a good from a change in its price

Question 2

Formula for PED

Answer 2

percentage change in quantity demanded/percentage in price of a good

Question 3

Define inelastic demand (3)

Answer 3

goods insensitive to changes in price

percentage change in quantity of goods/service < percentage change in price

0 < PED < 1

Question 4

Define elastic demand (2)

Answer 4

goods sensitive to changes in price

percentage change in quantity demanded of goods/service > percentage change in price

PED > 1

Question 5

Determinants of elasticity of demand (5)

Answer 5

number of substitutes

degree of necessity

income

addictiveness

time period

Question 6

Define perfectly elastic demand (2)

Answer 6

change in price leads to infinite change in QD

PED = infinite

Question 7

Define unitary elastic demand (2)

Answer 7

change in price leads to proportionally equal change in QD

PED = 1

Question 8

Define perfectly inelastic demand (2)

Answer 8

change in price leads to no change in QD

PED = 0

Question 9

Total revenue for inelastic goods (2)

Answer 9

price increase = TR increase

price decrease = TR decrease

Question 10

Total revenue for elastic goods (2)

Answer 10

price increase = TR decrease

price decrease = TR increase

Question 11

Total revenue for unitary elastic goods

Answer 11

price increase/decrease = no change

Question 12

Define primary commodities (3)

Answer 12

raw materials

necessities with no close substitutes

gold, oil, food

Question 13

Examples of manufactured goods (2)

Answer 13

produced by labour using capital + land resources

clothes, machinery

Question 14

Define income elasticity of demand (YED) (2)

Answer 14

measure of how responsive quantity demanded is to a change in consumer income

percentage change in quantity demanded/percentage change in income

Question 15

Inelastic YED (3)

Answer 15

0 < YED < 1

change in income leads to small change in quantity demanded

normal good

Question 16

Elastic YED (3)

Answer 16

YED > 1

change in income leads to large change in quantity demanded

normal good + necessity

Question 17

YED < 0

Answer 17

inferior good

Question 18

X + Y axis on Engel curve (2)

Answer 18

income on Y

quantity demanded on X

Question 19

YED of necessities (2)

Answer 19

0 < YED < 1 : inelastic YED

consumers will still buy similar amount of necessities even if income increases

Question 20

YED of luxuries (2)

Answer 20

YED > 1 : elastic YED

consumers will buy more luxuries if income increases

Question 21

YED of inferior goods (2)

Answer 21

YED < 0 : inelastic YED

consumers will buy less goods if income increases

Question 22

Engel Curve trend (3)

Answer 22

low incomes = goods are luxuries

as income increases, goods become necessities

high income levels, goods become inferior

Question 23

How do firms use YED (2)

Answer 23

incomes typically rise during economic growth

firms can see if product is inferior or normal based on YED + predict earnings

Question 24

How is YED used in economic sectors

Answer 24

changes in income = change output of economy to move towards different sectors

Question 25

Define Price Elasticity of Supply (PES)

Answer 25

measurement of how much quantity supplied changes in response to a change in price

Question 26

PES formula

Answer 26

% change in quantity supplied/%change in price

Question 27

Determinants of PES (5)

Answer 27

time - how long it takes to produce good

flexibility of production - how easily can resources used be changed

unused capacity - can firm easily increase output

storage ability - ability for firm to store stock

rate of production costs - how expensive/scarce are resources

Question 28

PES of primary commodities (2)

Answer 28

low PES compared to manufactured goods

have high investment + long periods of work