Micro- Elasticity Of Demand

Question 1

What is the concept of elasticity?

Answer 1

The responsiveness of x to a change in y

Question 2

Define PED

Answer 2

Responsiveness of QD to a change in price

Question 3

What is the formula for PED?

Answer 3

% change in QD/ % change in price

Question 4

Formula for percentage change

Answer 4

New- original/ original x 100

Question 5

What happens when PED=0 (perfectly inelastic)

Answer 5

Demand does not change in response to a change in price
E.g. life saving drug from £13.50 to £750

Question 6

What happens when PED = 0<(-)1 (inelastic)

Answer 6

When consumers are very sensitive to a change in price
% change in quantity demanded is smaller than % change in price (necessity goods)

Question 7

What happens when PED>(-1) (elastic)

Answer 7

Consumers are sensitive to a change in price % change in QD exceeds the % change in price (normal/ luxury goods)

Question 8

What happens when PED= -1 (unitary PED)

Answer 8

% change in price= % change in demand

Question 9

What happens when PED is perfectly elastic?

Answer 9

When consumers buy a good at one price

Question 10

How to calculate total revenue?

Answer 10

Price per unit x quantity
It is the income generated through the sales of goods

Question 11

What factors affect PED?

Answer 11

Number of close substitutes
Cost of switching products
Degree of necessity
Proportion of consumer income allocated to spending on that good (products that take up high % of income will have a more elastic demand)
Time period following price change
Is the good consumed out of habit?
Peak and off- peak demand
How broadly or specifically a good is defined

Question 12

To what extent is PED useful to producers?

Answer 12

Effect of a change in price of total revenue
Effect of a change of indirect tax- whether it can be passed onto consumer
Impact on price discrimination policy
Impact of possible promotional discounts

Question 13

What happens when a product is inelastic

Answer 13

QD is less responsive and QD falls in response to increase in price but not as much a % change in price

Question 14

why would PED be important to a business?

Answer 14

it helps to determine whether their revenue would increase or decrease depending in whether they increased or decreased the price, and establish if their good is a want or a need

Question 15

what is cross price elasticity of demand?

Answer 15

the responsiveness of a change in quantity demanded for good x following a change in price of good y

Question 16

what is the equation for cross price elasticity of demand?

Answer 16

% change in QD of good x/ % change in price of good y

Question 17

what’s a substitute good?

Answer 17

products in competitive demand. with substitutes an increase in the price of one good will lead to an increase in demand for a rival good. the value is always positive

Question 18

what are compliment goods?

Answer 18

products in joint demand. a fall in price of one price for a product leads to an increase in demand for the complimentary product

Question 19

what is income elasticity of demand?

Answer 19

measure of responsiveness of demand to a change in income

Question 20

what is the equation for income elasticity of demand?

Answer 20

% change in QD/ % change in income