PED, YED and PES

Question 1

Define ‘price elasticity of demand’ and state its equation.

Answer 1

The responsiveness of demand to a change in price of a good/service
PED = %∆ in QD ➗ %∆ in Price

Question 2

What is inelastic demand?

Answer 2

A change in price resulting in a smaller change in the quantity demanded

Question 3

What is elastic demand?

Answer 3

A change in price resulting in a greater change in the quantity demanded

Question 4

What are the 5 types of PED?

Answer 4

Perfectly Inelastic Demand
Relatively Inelastic Demand
Unitary Elastic Demand
Relatively Elastic Demand
Perfectly Elastic Demand

Question 5

What is the equation for profit?

Answer 5

Profit = Total Revenue - Total Costs

Question 6

Define ‘total revenue’ and state its equation.

Answer 6

The amount of money generated from the sale of goods

Price x Quantity Sold

Question 7

What are the six factors affecting PED?

Answer 7

Proportion of income spend on a product
Luxury vs degree of necessity
Addictive goods
No. of uses
Time period
Substitutes

Question 8

How does the proportion of income spent on a product affect PED?

Answer 8

The greater proportion of income spent on the product, the more price elastic the product is.

Question 9

How does a product’s degree of necessity affect its PED?

Answer 9

The more of a luxury the product is, the more price elastic it is.

Question 9

How does the addictiveness of a product affect PED?

Answer 9

The more addictive the good is, the more price inelastic it is.

Question 10

How does a product’s number of uses affect PED?

Answer 10

The more uses the product has, the more price inelastic it is.

Question 11

How does the length of time a product can be used for affect PED?

Answer 11

The more time it can be used for, the more price elastic it is.

Question 12

How does the availability of substitutes affect PED?

Answer 12

The more substitutes a product has, the more price elastic it is.

Question 13

Define ‘income elasticity of demand’ and state its equation.

Answer 13

The responsiveness of demand to a change in income

YED = %∆ in QD ➗ %∆ in Income

Question 14

What type of goods are income inelastic?

Answer 14

Necessities and addictive goods

Question 15

What type of goods are income elastic?

Answer 15

Luxury goods

Question 16

Define the term ‘discretionary expenditure’.

Answer 16

Non-essential spending/spending that isn’t automatic

Question 17

Define ‘price elasticity of supply’ and state its equation.

Answer 17

The responsiveness of supply to a change in price of a good/service
PES = %∆ in QS ➗ %∆ in Price

Question 18

State the seven factors affecting PES.

Answer 18

Stocks
Time
Ease of Entry/Exit
Mobility of FoPs
Production Speed
Spare Capacity
Scarcity

Question 19

How does stocks affect PES?

Answer 19

The more stocks there is of a product, the more responsive firms can be and therefore the more elastic the product is.

Question 20

How does time affect PES?

Answer 20

The longer length of time a product takes to be produced, the less responsive firms can be and therefore the more inelastic the product is.

However, the more time firms have to react, the more elastic a product is.

Question 21

How does the ease of entry affect PES?

Answer 21

The more barriers to entry there are into a product’s industry, the more inelastic the product is.

Question 22

How does the mobility of factors of production affect PES?

Answer 22

The more easily producers can switch production factors to other uses, the more elastic supply is.

Question 23

How does production speed affect PES?

Answer 23

The faster a product can be produced, the more elastic the product is.

Question 24

How does spare capacity affect PES?

Answer 24

The more spare capacity a producer has, the more elastic their supply is.

Question 25

How does scarcity affect PES?

Answer 25

The more scarce a product is, the more inelastic supply is.