Pack 3: Elasticity

Question 1

What is price elasticity of demand (PED)?

Answer 1

Measures responsiveness of quantity demanded of a product to changes in its price.

Question 2

What factors influence PED?

Answer 2

~Number of substitutes
~% income spent
~Habit forming good
~necessity of luxury
~Time
~width of market definition

Question 3

What is inelastic demand?

Answer 3

When there is a less than proportionate change in demand in comparison

Question 4

What is elastic demand?

Answer 4

When there is a more than proportionate change in demand in comparison

Question 5

What is perfectly price inelastic demand?

Answer 5

no change in quantity demanded following price change. PED = 0

Question 6

What is perfectly price elastic demand?

Answer 6

Quantity demanded infinite at given price, no quantity demanded at any other price. PED = infinity

Question 7

What is unitary elastic demand?

Answer 7

Change in price met with proportionate change in demand. PED = -1

Question 8

What is total revenue (TR)?

Answer 8

Money earned from selling products. Price x Quantity

Question 9

What is income elasticity of demand (YED)?

Answer 9

measures responsiveness of quantity demanded of a good to changes in real incomes

Question 10

What is an inferior good?

Answer 10

Good demanded less as incomes rise. YED is negative

Question 11

What is a normal good?

Answer 11

Good demanded more as incomes rise. YED is positive

Question 12

What is a luxury good?

Answer 12

Type of normal good, demand rises/falls more proportionally to change in incomes. YED is above +1

Question 13

What is the significance of YED for businesses?

Answer 13

Significant effect on profitability of firms, may have to change their production levels or range, to match income levels.

Question 14

What is cross price elasticity of demand (XED)?

Answer 14

Measures responsiveness of quantity demanded of one good to the change in price of another

Question 15

What is a substitute good?

Answer 15

Good demanded more when price of related good rises. XED is positive

Question 16

What is a complementary good?

Answer 16

Good demanded less when price of related good rises. XED is negative

Question 17

What is an unrelated good?

Answer 17

Demand for one good isn’t affected by the change in price of another. XED = 0

Question 18

What is the significance of XED for businesses?

Answer 18

Determines demand for their product and so their revenue/profits, will need to make production decisions to respond to demand changes

Question 19

What is price elasticity of supply?

Answer 19

Measures responsiveness of quantity supplied of a good to changes in price

Question 20

What is the short run?

Answer 20

Time period where at least one factor of production remains fixed

Question 21

What is the long run?

Answer 21

Time period where all factors of production can be varied

Question 22

Will supply be more elastic in the long run or short run?

Answer 22

Long run - takes time to increase supply

Question 23

What factors influence PES?

Answer 23

~Availability of stockpiles
~Perishability
~State of economy and levels of spare capacity
~Entry of firms into market
~Ease of factor substitution

Question 24

On an indirect tax with an inelastic demand, who will the larger incidence be on?

Answer 24

The consumers

Question 25

On a subsidy with an inelastic demand, who will have the larger benefit?

Answer 25

The consumers