Micro – Elasticities

Question 1

What is the Formula to Calculate PED?

Answer 1

% Changes in Quantity / % Changes in Price

Question 2

State and explain the Values of PED

Answer 2

• Price inelastic when PED < 1
• Price elastic when PED > 1
• Perfectly elastic when PED = (infinity)
• Perfectly inelastic when PED = 0
• Unitary elastic when PED = 1

Question 3

How is PED distributed along a Straight-Line Downwarding Demand Curve?

Answer 3

PED will be elastic in the higher area of the curve, unitary elastic in the middle, and inelastic at the bottom.

Question 4

What are the Determinants of PED?

Answer 4

1) Number and closeness of substitutes
2) Necessities vs luxury goods
3) Length of time (longer time period = more elastic)
5) Proportion of income spent (larger = more elastic)

Question 5

Explain the Relationship between Demand and Total Revenue

Answer 5

When demand is elastic an increase in price will cause a decrease in revenue, this is the opposite of inelastic demand. Instead when it is unit-elastic revenue will not change.

Question 6

What is the relationship between Primary Commodities, Manufactured Products and PED?

Answer 6

Primary commodities are more inelastic as they have no substitutes, whilst manufactured products are the opposite.

Question 7

What is the problem linked to Primary Commodities and PED?

Answer 7

As primary commodities experience higher inelastic demand, if supply is reduced (leftward shift) it will lead to higher prices. In the case of agriculture this could mean that a “bad crop” with a small harvest could be more expensive than a “good crop” with a bigger harvest. This means a “bad crop” will be more favorable than a “good crop”.

Question 8

What is the Formula to Calculate YED?

Answer 8

% Change in Quantity / % Change in Income

Question 9

State and explain the Values of YED

Answer 9

• Income elastic when YED > 1

* Income inelastic when YED < 1

Question 10

What are the Values of YED which distinguish Types of Goods?

Answer 10

• Inferior when YED < 0
• Normal/Necessity when YED < 1
• Normal/Luxury when YED > 1

Question 11

What does the Engel Curve Represent?

Answer 11

It shows a continuum: at very low incomes a good might be a luxury, as income increases it becomes a necessity, and finally at higher income levels it becomes inferior.

Question 12

How does YED affect firms?

Answer 12

The greater YED is elastic, the greater the expansion of its market is likely to have in the future. Still, during a recession, markets which sell elastic goods take the hardest hit.

Question 13

How does YED affect sectoral changes in the economy?

Answer 13

The sector with highest elastic demand is more likely to experience growth decreasing the others.

Question 14

What is the Formula to Calculate PES?

Answer 14

% Change in Quantity Supplied / % Change in Price

Question 15

State and explain the Values of PES

Answer 15

• Price inelastic when PES < 1

* Price elastic when PES > 1

Question 16

What are the determinants of PES?

Answer 16

1) Length of time
2) Mobility of factors of production (quickness of shift)
3) Spare capacity available
4) Storage ability
5) Rate at which costs increase (high = inelastic)

Question 17

What is the relationship between Primary Commodities, Manufactured Products and PES?

Answer 17

Primary commodities will be price inelastic whereas manufactured products will be price elastic. This is primarily due to the factor of time (e.g. in agriculture more time is needed to grow crops).

Question 18

What is the problem linked to Primary Commodities and PES?

Answer 18

As primary commodities are price inelastic, it contributes to income instability for producers. As the demand curve fluctuates (shifts) there will be higher price fluctuations for producers leading to unstable revenue.