Lecture 04 # Price Elasricity

Question 1

Define Elasticity.

Answer 1

Elasticity: A measure of how much one economic variable changes in response to changes in another, such as the change in quantity demanded or supplied due to price or income changes.

Question 2

What is Price Elasticity?

Answer 2

Price elasticity of demand (PED) measures how much the quantity demanded of a good or service changes in response to a change in its price.

Question 3

Formula for PED?

Answer 3

PED = % Change In Quantity Demanded / % Change In Price.

Question 4

Categories of Price Elasticity of Demand?

Answer 4

1. Unit Elastic: PED=1.
2. Elastic: PED>1.
3. Inelastic: PED<1.
4. Perfectly Elastic: PED=infinity.
5. Perfectly Inelastic: PED=0.

Question 5

Describe Pricing Strategy as impact of price elasticity.

Answer 5

1. Pricing Strategy: Elasticity guides pricing: lower prices for elastic goods can boost revenue, while higher prices for inelastic goods can increase revenue with minimal impact on demand.

Question 6

Describe Revenue Maximization as impact of price elasticity.

Answer 6

2. Revenue Maximization: To maximize revenue, lower prices for elastic goods and higher prices for inelastic goods.

Question 7

Describe Consumer Behavior Insights as impact of price elasticity.

Answer 7

3. Consumer Behavior Insights: Elasticity reveals that price-sensitive consumers may switch easily for elastic goods, while those for inelastic goods are less responsive to price changes and may prioritize the product.

Question 8

Describe Market Dynamics as impact of price elasticity.

Answer 8

Market Dynamics: Elasticity affects market equilibrium; small price changes in elastic markets can lead to significant shifts in demand and supply.

Question 9

Describe Policy Implications as impact of price elasticity.

Answer 9

Policy Implications: Elasticity helps governments assess the effects of taxes or subsidies on consumer behavior and market outcomes, aiding in the design of effective economic policies.

Question 10

Describe Product Differentiation as impact of price elasticity.

Answer 10

Product Differentiation: Elasticity influences differentiation success; unique features can command higher prices in elastic markets, while inelastic markets may see consumers pay more for essential goods regardless of differentiation.

Question 11

Describe Forecasting and Planning as impact of price elasticity.

Answer 11

Forecasting and Planning: Businesses use elasticity to predict demand changes due to price adjustments, aiding in production, inventory, and marketing planning.

Question 12

How to calculate different types of elasticities?

Answer 12

CALCULATIONS OF ELASTICITIES:
a) Price elasticity of demand / PED
PED: %∆Qd / %∆P
b) Income elasticity of demand/ IED
IED: %∆Qd / %∆I
c) Cross elasticity of demand / XED
XED: %∆QA / %∆PB
d) Price elasticity of supply / PES
PES: %∆Qs / %∆P
e) Expenditure method / revenue analysis method
EXP: P × Q

Question 13

FACTORS INFLUENCING PRICE ELASTICITY OF DEMAND?

Answer 13

1. Nature Of Goods
2. Number Of Substitutes
3. Number Of Uses
4. Habit
5. Level Of Income /Budget
6. Part / share Of Total Expenditure
7. Price Of Own Good
8. Time Period
9. Postponing of Use
10. Tied Demand / Joint Demand

Question 14

What is Price Elasticity of Supply?

Answer 14

Price elasticity of supply (PES) measures how much the quantity supplied of a good or service changes in response to a change in its price.

Question 15

Formula for PES?

Answer 15

PES = % Change In Quantity Supplied / % Change In Price

Question 16

Categories of Price Elasticity of Supply?

Answer 16

1. Unit Elastic: PES=1.
2. Elastic: PES>1.
3. Inelastic: PES<1.
4. Perfectly Elastic: PES=infinity.
5. Perfectly Inelastic: PES=0.

Question 17

FACTORS INFLUENCING PRICE ELASTICITY OF SUPPLY?

Answer 17

1. Availability of Inputs
2. Availability of Inventory of finished goods
3. Production Time
4. Storage Or Stockpiling Capabilities
5. Flexibility Of Production Processes
6. Time Period