LS12 and 13 - PED & Consumer and Producer Surplus

Question 1

Price elasticity of demand

Answer 1

Measures the responsiveness of Demand given a change in price

Question 2

Elastic Demand

Answer 2

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

Question 3

Inelastic Demand

Answer 3

Where a change in price causes a proportionately smaller change in demand

Question 4

Price Elasticity of Supply

Answer 4

Measures the responsiveness of supply given a change in price causes

Question 5

Supply Elastic

Answer 5

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

Question 6

Supply Inelastic

Answer 6

When a change in price causes a proportionately smaller change in supply

Question 7

Factors that affect the Price Elasticity of Demand

Answer 7

SPLAT
S - Substitutes
Substitutes make it Elastic

P - Proportion of Income
Large proportion of income=Elastic
Small=Inelastic

L - Luxury/Necessity Luxury=Elastic
Necessity=Inelastic

A - Addictiveness. Addictive=inelastic

T - Time. Short time to find alternative=inelastic Long time=elastic

Question 8

Factors that affect the Price Elasticity of Supply

Answer 8

PSSPT

P - Production Lag
Production lag is where the longer the time it takes to produce a good, the more inelastic the good would be. If firms cant produce the goods quick, they cant respond to the changes in supply quick

S - Stock. Higher the stock, the more elastic PES is.

S - Spare Capacity. This is the amount of spare factors of production there are. More spare capacity means more PES Elastic

Perishability of the Product - Some products are more perishable than others and this makes it more inelastic because it is hard to build up stocks of the good

T - Time. Time gives the opportunity for the firms to expand or reduce production. More time=more elastic

Question 9

How to Calculate Price Elasticity of Demand

Answer 9

% Change in quantity demanded / % Change in price

Question 10

How to calculate Price Elasticity of Supply

Answer 10

% Change in quantity supplied / % Change in Price

Question 11

Unitary Elastic

Answer 11

PED=1
Shown through a vertical line

Question 12

Elastic

Answer 12

PED>1

PED is greater than 1

Question 13

Inelastic

Answer 13

PED<1

PED is smaller than 1
Steep curve

Question 14

Perfectly elastic

Answer 14

PED=0

Shown through a horizontal line

Question 15

Consumer Surplus

Answer 15

The difference between the price the consumer is willing to pay and the price they actually pay

Shown at the top triangle in the diagram

Question 16

Producer Surplus

Answer 16

The difference between the price the supplier is willing to produce their product at and the price they actually sell at.

Shown at the bottom of the diagram

Question 17

Impact of Elastic Demand on Consumer Surplus

Answer 17

More elastic demand is, the greater consumer surplus is meaning they pay less

Question 18

The effect of a REDUCTION in demand on consumer and producer surplus

Answer 18

There will be a fall in consumer surplus and producer surplus

Question 19

The effect of a INCREASE in demand on consumer surplus and producer surplus

Answer 19

There will be a rise in consumer surplus and also producer surplus as the demand shifts to the right

Question 20

The effect of a DECREASE in supply on consumer surplus and producer surplus

Answer 20

There will be a fall in consumer surplus and producer surplus

Question 21

The effect of an INCREASE in supply on consumer surplus and producer surplus

Answer 21

There will be a rise in consumer surplus and producer surplus

Question 23

Inelastic Demand on Consumer Surplus AND Consumer Burden

Answer 23

Inelastic demand means that demand is more vertical. Consumer burden is greater and Consumer surplus is smaller