MICRO Elasticities

Question 1

Price Elasticity of Demand (PED)

Answer 1

Measure the responsiveness of demand following a change in a products price.

Question 2

• Price Elastic Demand
• Price Unit Elastic Demand
• Price Inelastic Demand

Answer 2

• Demand responds more than proportionately to a change in price.
• Demand responds proportionately to a change in price.
• Demand responds less than proportionately to a change in price.

Question 3

Factor that affect PED

Answer 3

• Cost of switching suppliers
• Availability of substitutes
• % of income
• Degree of necessity
• Habitual purchase (addiction)
• Time frame
• Brand Loyalty

Question 4

Short run vs Long run PED

• In long run…
• In short run…
• Reasons

Answer 4

• elasic
• inelastic
• Takes time to change habits
• Necessity
• Technology changes take time

Question 5

Income Elasticity of Demand (YED)

Answer 5

Measures the responsiveness of demand following a change in disposable income

Question 6

YED for types of goods

Answer 6

YED>1 Basic luxury e.g. TV

0,YED,1 Basic normal goods e.g. fresh fruit

YED<0 Inferior goods e.g. council-owned properties or brand own supermarket foods

Question 7

Cross Price Elasticity of Demand (XED)

Answer 7

Measure the responsiveness of demand for good X following a change in the price of a related good Y.

Question 8

XED for types of goods

Answer 8

XED>1 Strong Substitutes, e.g. CDs and digital music

0,XED,1 Weak Substitutes, e.g. Ketchup and Mayonnaise

-1,XED,0 Weak Compliments, e.g. Chicken and Rise

XED<-1 Stong Compliments, e.g. Popcorn and cinema tickets

Question 9

Price Elasticity of Supply (PES)

Answer 9

Measures the responsiveness of supply after a change in a products price.

Question 10

• Price Elastic Supply
• Price Unit Elastic Supply
• Price Inelastic Supply

Answer 10

• Supply responds more than proportionately to a change in price.
• Supply responds proportionately to a change in price.
• Supply responds less than proportionately to a change in price.

Question 11

Factors that affect PES

Answer 11

• Spare capacity in the firm
• Stock of finished products and components
• Time period/speed of production
• Ease and cost of factor substitution/mobility (occupationally mobile?)