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Question 1

Price Elasticity of Demand:

Answer 1

Measures the responsiveness of quantity demanded to small change in price

Calculated as % change in quantity demanded divided by % change in price

I.e if price fell by 10% and quantity demanded rose by 15% it = 1.5

delta demand over delta price

Question 2

Elastic and Inelastic Real Life Examples:

Answer 2

Elastic demand - airline travel, furniture, entertainment, electricity

Inelastic demand (necessities) - transport, fruits, meat/fish, tobacco (as its addictive), wine, beer

use the heroin metaphor

Question 3

Total outlay

Answer 3

Total outlay is price multiplied by quantity sold

Question 4

Special Case 1 - Perfectly Elastic Demand:

Answer 4

When demand is perfectly elastic, demand curve is a horizontal line

Consumers will demand an infinite quantity at this price but nothing at a price above (rarely occurs)

Question 5

Special Case 2 - Perfectly Inelastic Demand:

Answer 5

When demand is perfectly inelastic demand curve is vertical straight line

Consumers are willing to pay any price to obtain a given quantity of a good i.e anti-venom

Question 6

Significance of the Price Elasticity of Demand:

Answer 6

For Producers:

If demand is elastic, they could reduce their prices and increase their total revenue

If it is inelastic, they could increase prices and increase total revenue and profits

For Governments:

Need to understand elasticity when designing tax policies and government prices i.e price of public transport)

For goods that are inelastic i.e tobacco, government can impose higher taxes and increase government revenue

For elastic goods i.e luxury items, a higher tax will raise the price of the good and reduce consumer demand, resulting in reduced government revenue