micro 2.5/ 2.6- elasticities of demand/supply

Question 1

Define elasticity

Answer 1

elasticity shows how sensitive/responsive one variable is to another

Question 2

Define PED, or Price Elasticity of Demand.

Answer 2

PED measures the responsiveness of Qd (quantity demanded) due to changes in price.

Question 3

Describe the diagram for a highly responsive or elastic good.

Answer 3

The slope/gradient will be flatter

Question 4

Describe the diagram for a less responsive or inelastic good.

Answer 4

The slope/gradient will be steeper

Question 5

State the formula for PED

Answer 5

PED= percentage change in Qd/percentage change in price

Question 6

PED will always have a ——– value due to the ——–.

Answer 6

PED will always have a negative value due to the law of demand.

Question 7

What is the rule for categorising PED?

Answer 7

Use the absolute value of the PED, ignoring the minus sign.

Question 8

State the 5 ranges of PED

Answer 8

• inelastic
• elastic
• perfectly inelastic
• perfectly elastic
• unitary elastic

Question 9

Describe an inelastic PED

Answer 9

• when (the Qd of) something is not very responsive (to changes in price).
• 0<|PED|<1
• %∆P>%∆Qd
• gradient of demand curve steeper

Question 10

Describe an elastic PED

Answer 10

• when (the Qd of) something is very responsive (to changes in price).
• |PED|>1
• %∆P<%∆Qd
• gradient of demand curve flatter

Question 11

Describe a perfectly inelastic PED

Answer 11

• vertical demand curve
• PED=0
• Qd does not respond to changes in P

Question 12

Give an example of where a perfectly inelastic PED may occur

Answer 12

An essential medicine with no substitutes.

Question 13

Describe a perfectly elastic PED

Answer 13

• horizontal demand curve
• PED= ∞
• Qd is entirely dependent on P (buyers will only buy at one price and no other)

Question 14

Give an example of where a perfectly elastic PED may occur

Answer 14

very theoretical, but luxury products like high end cars

Question 15

Describe a unitary elastic PED

Answer 15

• hyperbola demand curve
• |PED|=1
• %ΔP=%ΔQd

Question 16

effect of a PED determinant on a demand graph

Answer 16

affects the slope of the curve

Question 17

state the 4 PED determinants

Answer 17

1. number and closeness of substitutes
2. Degree of necessity
3. proportion of income spent on good
4. time
   (never deprive people of time)

Question 18

Describe number and closeness of substitutes as a PED determinant

Answer 18

• many and close substitutes= elastic (consumer can switch to other substitutes easily)
• few/remote substitutes= inelastic (consumers do not have as many options)

Question 19

Describe degree of necessity as a PED determinant and give examples

Answer 19

• necessity= inelastic (eg medicine, food, water)
• luxury= elastic (eg holidays abroad, high end cars)

Question 20

Describe proportion of income spent on a good as a PED determinant

Answer 20

• small proportion (cheap)= inelastic as disposable income Yd is not affected significantly
• large proportion (expensive)= elastic as disposable income Yd is affected significantly

Question 21

Describe time as a PED determinant

Answer 21

• short term= inelastic (less time to change buying habits)
• long term= elastic (more time to change buying habits)

Question 22

give an example of time as a PED determinant

Answer 22

if the price of petrol rises, in the short term there are limited things that you can do/choices, but in the long term consumers can exchange their big, highly consuming cars (eg jeeps) for smaller, less consuming cars (eg electric)

Question 23

give the formula for total revenue

Answer 23

TR= no. of goods sold x price of goods sold

Question 24

Describe relationship between PED and total revenue

Answer 24

If demand is price inelastic, total revenue will move in the direction of the price change.
If demand is price elastic, total revenue will move in the opposite direction to the price change.

Question 25

Give 3 uses of PED for firms/governments

Answer 25

- pricing policies - to determine tax burden (consumer/producer burden) - to price discriminate

Question 26

Describe the use of PED for firms

Answer 26

For pricing policies; knowledge of PED helps determine if they need to increase or decrease their prices in order to maximise revenue - elastic good (%∆P<%∆Qd): prices should decrease - inelastic (%∆P>%∆Qd): prices should increase

Question 27

Define YED, or income elasticity of demand

Answer 27

YED measures the responsiveness of the Qd of a good due to changes in income

Question 28

Give the formula for YED, or income elasticity of demand

Answer 28

YED= %ΔQd/%ΔY

Question 29

Give the range of values for the YED of an inferior good

Answer 29

YED<0; as income increases, demand for the good decreases

Question 30

Give the range of values for the YED of a normal good

Answer 30

YED>0; as income increases, demand for the good also increases.

Question 31

Define income inelastic goods

Answer 31

- 0%ΔQd - eg necessities

Question 32

Define income elastic goods

Answer 32

- YED>1 - %ΔY<%ΔQd - eg luxuries

Question 33

Describe YED curves for normal goods, both elastic and inelastic

Answer 33

- Income (Y) on y axis, quantity on x axis - upward sloping curve - income inelastic= steep gradient - income elastic= flatter gradient

Question 34

describe and draw an Engel curve

Answer 34

1. as Y increases, Qd increases- good acts as a NORMAL good, so YED>0 2. people don't want to buy more of the good despite being able to, they have the max amount they want- good becomes perfectly inelastic, so YED=0 3. The good is 'beneath' consumers- becomes inferior, so YED<0

Question 35

define PES, or price elasticity of supply

Answer 35

PES measures the responsiveness of Qs to changes in price

Question 36

what range of values must PES always be?

Answer 36

PES is always positive

Question 37

state the 5 ranges of PES

Answer 37

- inelastic - elastic - perfectly inelastic - perfectly elastic - unitary elastic

Question 38

give the formula for PES

Answer 38

PED= percentage change in Qs/percentage change in price

Question 39

describe an elastic PES

Answer 39

- supply can change quickly as good is easily produced - PES>1 - %ΔP<%ΔQs - flatter supply curve

Question 40

describe an inelastic PES

Answer 40

- supply can't change quickly as good is not easily produced - 0%ΔQs - steeper supply curve

Question 41

describe a perfectly inelastic PES

Answer 41

- vertical supply curve - PES= 0 - Qs not affected by changes in price

Question 42

state 3 possible causes of a perfectly inelastic PES

Answer 42

- immediate time (make more food NOW) - fixed quantity of the good supplied now (eg theatre/stadium seats) - fixed quantity and no possibility of producing more (eg original artwork)

Question 43

describe a perfectly elastic PES

Answer 43

- horizontal supply curve - PES= ∞ - Qs is entirely dependent on P (producers will only make at one price and no other)

Question 44

give a possible cause of a perfectly elastic PES

Answer 44

infinite global supply of a product

Question 45

describe a unitary elastic PES

Answer 45

- PES=1 -%ΔP=%ΔQs - straight supply line that goes through the origin

Question 46

state 5 PES determinants

Answer 46

1. time 2. mobility of factors of production 3. unused capacity 4. ability to store 5. rate at which costs increase

Question 47

describe time as a PES determinant

Answer 47

- immediate time: all FOPs are fixed, so supply is perfectly inelastic - short run: some FOPs are fixed, so supply is inelastic - long run: all FOPs are variable, so supply is very elastic

Question 48

describe mobility of FOPs as a PES determinant

Answer 48

- higher mobility → more elastic (easier to change to another production with less costs when price rises) - lower mobility → less elastic (harder to change to another production with less costs when price rises)

Question 49

describe unused capacity as a PES determinant

Answer 49

- full capacity: inelastic as time is needed to buy new machines - excess capacity: elastic as you can just start using the unused machines

Question 50

describe ability to store as a PES determinant

Answer 50

- low ability: inelastic- can't release stocks in market if demand increases suddenly - high ability: elastic- you can release stocks if necessary

Question 51

describe rate at which costs increase as a PES

Answer 51

lower rate= more elastic as firms have a longer period of time to adjust and respond higher rate= less elastic as firms have less time to adjust and respond