MICRO - LS12 - Elasticity

Question 1

Price elasticity of demand (PED)

Answer 1

It measures the responsiveness of demand given a change in price

Question 2

Demand is said to be price elastic when…

Answer 2

A change in price causes a proportionally larger change in demand

Question 3

Demand is said to be price inelastic when..

Answer 3

A change in price causes a proportionally smaller change in demand

Question 4

Determinants of PED

Answer 4

• number of substitutes
• necessity/luxury
• addictiveness
• time
• proportion of income on the product
• cost of switching suppliers/brand loyalty

Question 5

Number of substitutes

Answer 5

The more substitutes a product has, the greater the degree of consumer switching will be when there is a price change
So more substitues the more elastic demand will be

Question 6

Necessity/luxury

Answer 6

• if a product is considered a necessity demand is likely to be inelastic as people need it no matter the price
• luxury products are elastic

Question 7

Addictiveness

Answer 7

The more addictive the product is the more inelastic it is

Question 8

Time

Answer 8

Time gives consumers the opportunity to find alternatives
The more time, the more elastic as more substitutes can be foumd

Question 9

Proportion of income on the product

Answer 9

The greater the proportion of income spent on a product, less amount of customers can afford price rises
So the greater the proportion of income spent on the product, the more elastic demand will be

Question 10

Derived demand

Answer 10

Comes from the demand of something else
Demand of one product drives the demand for another
E.g. demand in housing results in demand for roofers/builders

Question 11

Composite demand

Answer 11

Composite demand happens when goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other
E.g. if more milk is used to make cheese, lower supply for yogurt

Question 12

Joint/complementary demand

Answer 12

demand for one product is directly and positively related to market demand for a related good or service

Question 13

Effective demand

Answer 13

refers to the willingness and ability of consumers to purchase goods at different prices

Question 14

PED equation

Answer 14

PED = (%change in quantity demanded)/(%change in price)

Question 15

Elastic PED value

Answer 15

Greater then 1

Question 16

Inelastic PED value

Answer 16

Between 0 and 1

Question 17

Unitary PED meaning

Answer 17

Price and demand go up/down by same amount

Question 18

Unitary PED value

Answer 18

1

Question 19

Perfectly inelastic value (PED/PES)

Answer 19

0

Question 20

Price elasticity of supply definition (PES)

Answer 20

Measures the responsiveness of supply given a change in price

Question 21

Supply is price elastic when

Answer 21

A change in price causes a proportionally larger change in supply

Question 22

Supply is price inelastic when

Answer 22

A change in price causes a proportionally smaller change in supply

Question 23

Determinants of PES

Answer 23

• Time required to produce product
• level of spare capacity
• number of stocks/finished goods available
• time
• perishability of the product

Question 24

Time required to produce the product

Answer 24

• The greater the time, the more inelastic supply will be
• If it can be produced quickly firms will be able to respond to price changes rapidly
• So products with a short production time tend to be price elastic supply

Question 25

Level of spare capacity

Answer 25

The greater spare capacity is in an industry the more price elastic supply will be as more factors of production available for production so if price rise the industry/firm would respond quickly to increasing production

Question 26

Number of stocks/finished goods available

Answer 26

The more finished goods available the more price elastic supply will be, as firms can quickly respond to price change by releasing some/all stocks on market straight away

Question 27

Time (PES)

Answer 27

Gives firms opportunity to expand/reduce production
- greater time the more price elastic supply will be

Question 28

Perishability of the product

Answer 28

• the more perishable a product the harder it is to build stocks so more price inelastic e.g. mushrooms

Question 29

PES equation

Answer 29

PES = (%change in quantity supplied)/(%change in price)

Question 30

Elastic PES value

Answer 30

Greater then 1

Question 31

Inelastic PES value

Answer 31

Between 0 & 1

Question 32

Unitary PES value

Answer 32

=1

Question 33

Housing market

Answer 33

• at the moment shortage of housing:
• takes time to build - planning permission takes time
• scarce land in UK - small country
• shortage of construction workers (brexit)
• in Uk houses take time to build - use bricks/mortar vs US who use wood/nails

Question 34

Perfectly elastic PED & PES value

Answer 34

Infinity

Question 35

Latent demand

Answer 35

Willingness to buy but not yet ability to buy

Question 36

Individual demand

Answer 36

A consumer’s demand for good/service

Question 37

Market demand

Answer 37

All consumer’s demands in the market summed together

Question 38

Uses of PED

Answer 38

• determination of pricing policy/impact on revenue
• indication of competition faced (number/closeness of substitutes)
• price setting in price discrimination
• government decision on which goods to tax indirectly