Price determination in a Competitive Market- Elasticities

Question 1

What is the definition of Price Elasticity of Demand (Ped)

Answer 1

Measures the responsiveness of quantity demanded to changes in price.

Question 2

What is the equation for Ped?

Answer 2

% ∆ Qd / % ∆ P

Question 3

Why is Ped always a negative value?

Answer 3

The relationship between price and demand is inverse.

Question 4

What are the characteristics of elastic demand?

Answer 4

• More responsive to a change in price
• % ∆ Qd > % ∆ P
• The change in Qd/s is proportionally greater than change in P/Y

Question 5

What are the characteristics of inelastic demand?

Answer 5

• Less responsive to a change in price
• % ∆ Qd < % ∆ P
• The change in Qd/s is proportionally less than change in P/Y

Question 6

What is there between the sign and the value?

Answer 6

An iron curtain

Question 7

What is the definition of Yed?

Answer 7

Measures the responsiveness of demand to changes in income.

Question 8

What is the equation of Yed?

Answer 8

% ∆ D / % ∆ Y

Question 9

What is the sign for a normal and inferior good for Yed?

Answer 9

+ = normal good
- = inferior good

Question 10

What is the definition for Cross Elasticity of demand (Xed)?

Answer 10

Measures the responsiveness of demand for one good to changes in the price of another

Question 11

What is the equation for Xed?

Answer 11

% ∆ D of Good X / % ∆ P of Good Y

Question 12

What is the sign for a substitute or inferior good?

Answer 12

+ = substitute
- = complement

Question 13

What is the definition of Price Elasticity of Supply (Pes) ?

Answer 13

Measures the responsiveness of quantity supplied to changes in price.

Question 14

What is the equation for Pes?

Answer 14

% ∆ Qs / % ∆ P

Question 15

What are indirect taxes?

Answer 15

Taxes on expenditure/ consumption

Question 16

How do indirect taxes affect suppliers?

Answer 16

It is physically paid by suppliers which affects their costs of production and therefore affects market supply at each price.

Question 17

What are the two types of indirect taxes?

Answer 17

• Ad Valorem
• Specific taxes

Question 18

What are Ad Valorem taxes?

Answer 18

A percentage of the unit cost of a good e.g. VAT

Question 19

What are specific taxes?

Answer 19

A fixed tax per unit of the good of service produced.

Question 20

Why impose indirect taxes?

Answer 20

• To raise tax revenue
• To change the level of demand and the pattern of demand of different goods and services.

Question 21

Why do the government want indirect taxes to change the level of demand?

Answer 21

To deter and reduce consumption of harmful goods and services.

Question 22

How are taxes shown on PQ graph?

Answer 22

The vertical distance from the new equilibrium to the next curve.

Question 23

Why do the government want indirect taxes to change the pattern of demand?

Answer 23

To encourage the longer term conservation of scarce economic resources.