LS12

Question 1

Price elasticity of demand

Answer 1

Measures the responsiveness of demand given a change in price

Question 2

Demand is said to be price elastic when…

Answer 2

When a change in price causes a proportionately larger change in demand

Question 3

Demand is said to be price elastic when…

Answer 3

A change in price causes a proportionately smaller change in demand

Question 4

Determinants of price elasticity in demand

Answer 4

Number of substitutes - the more substitutes a product has, the greater the degree of consumer switching - more elastic
Necessities/luxuries - people require the product no matter the price - price inelastic
Addiction - the more addictive a product is, the more price inelastic
Time - the greater the time period, then, the more price elastic demand will be
Proportion of income spend on the product - the greater the proportion of income spend on a product, the more price elastic

Question 5

PED FORMULA

Answer 5

Percentage change in quantity demanded / percentage change in price

Question 6

Price elasticity of supply

Answer 6

Measures the responsiveness of supply given a change in price

Question 7

Supply is said to be price elastic when…

Answer 7

A change in price causes a proportionately larger change in supply

Question 8

Supply is said to be price inelastic when….

Answer 8

a change in price causes a proportionately smaller change in supply

Question 9

Determinants of price elasticity of supply

Answer 9

Time required to produce the product - greater the time needed to produce a product, the more price inelastic supply will be
Level of spare capacity - the greater spare capacity, the more price elastic supply will be
Number of stocks/finished goods available - the more finished goods available, the more price elastic supply will be
Time - greater the time period, the more price elastic supply will be
Perishability of the product - the more perishable a product is, the more price inelastic in supply the product will be

Question 10

PES FORMULA

Answer 10

Percentage change in quantity supplied / percentage change in price

Question 11

Consumer surplus

Answer 11

The extra amount of money consumers are prepared to pay for a good or service above what they actually pay

Question 12

Producer surplus

Answer 12

The extra amount of money paid to producer above what they are willing to accept to supply a good or service

Question 13

Incidence of an indirect tax?

Answer 13

Refers to the distribution of tax between consumers and producers

Question 14

When demand is price elastic, burden of tax will…

Answer 14

Fall on mostly producers

Question 15

When demand is price inelastic, burden of tax will…

Answer 15

Fall on mostly consumers

Question 16

The incidence of a subsidy

Answer 16

Refers to how the gains of the subsidy are distributed between consumers and producers

Question 17

When demand is price elastic, most of the gains go to…

Answer 17

Producers

Question 18

When demand is price inelastic, most of the gains go to…

Answer 18

The consumers

Question 19

What is the income effect?

Answer 19

Assuming a fixed level of income - as price falls, the amount that consumers can afford increases, so demand increases

Question 20

Marginal utility?

Answer 20

Utility or satisfaction obtained from consuming one extra unit of a good or service

Question 21

Diminishing marginal utility

Answer 21

As successive units of a good are consumed, the marginal utility gained from each extra unit will fall