Price elasticities of demand

Question 1

what is price elasticity of demand

Answer 1

measures the responsiveness of demand as a result of a change in price

Question 2

how to calculate ped

Answer 2

% change in QD/ %change in p

quaking ducks on a pond

Question 3

what does it mean when a the demand for a product is price elastic

Answer 3

it means demand changes a lot as a result in a change in price

Question 4

Characteristics of an elastic good

Answer 4

lots of substitutes

Question 5

what does it mean when the ped is 1 or more

Answer 5

the demand for the good is elastic

Question 6

what does it mean when the ped is less than 1

Answer 6

the demand for the good is inelastic

Question 7

3 characteristics of an inelastic good

Answer 7

1. It is a necessity
2. lack of substitutes
3. they have addictive features such as cigarettes

Question 8

why may a government chose to tax an inelastic good

Answer 8

to increase tax revenue as consumers are willing to pay higher prices and endure the tax burden

Question 9

what is the problem with government taxing inelastic goods such a cigarettes

Answer 9

it is a regressive tax and will greater impact those on lower incomes the taxed good takes a greater proportion of their income and the family may suffer from food poverty as a result

Question 10

how much revenue does the government gain from cigarette taxes

Answer 10

10 billion per year

Question 11

what is price elasticity of supply

Answer 11

Measures responsiveness of changes in quantity supplied as a result of changes in price

Question 12

demand

Answer 12

the quantity of a good or service consumers are willing to buy at a given price rate in a given time period

Question 13

non price determinants of demand

Answer 13

1. price of substitutes and compliments
2. income (interest)
3. changes in taste and advertising

Question 14

ceteris parabus

Answer 14

all other things being equal

EQ an outward shift in demand will result in a rise in prise and an increased quantity supplied (assuming ceteris paribus)

Question 15

supply

Answer 15

the quantity of goods a services firms are willing and able to produce at a given price

Question 16

non price determinants of supply

Answer 16

1. productivity (output per worker/capital)
2. taxes/ subsidy
3. cost of factors of production such as oil prices
4. weather

Question 17

how to calculate price elasticity of supply

Answer 17

%change in QS/ %change in Price

Quaking sharks on a pond

Question 18

why may some firms have an inelastic supply curve

Answer 18

1. firms have low levels of stock
2. if its difficult to increase production as cost of labour is expensive
3. eg agricultural products take time to grow and less able to adjust to demand

Question 19

income elasticity of demand

Answer 19

measures the responsiveness of demand as a result in a change in income

Question 20

income elasticity of demand calculation

Answer 20

% change in income/ % change in income

quaking ducks on ice

Question 21

what is composite demand

Answer 21

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. milk which can be used for cheese, yoghurts, cream, butter and other products.

Question 22

what does the existence of scarcity in the economy imply

Answer 22

that individuals must make a choice

Question 23

what is an economic good

Answer 23

good or service that has a benefit (utility) to society. Also, economic goods have a degree of scarcity and therefore an opportunity cost

Question 24

why is choice part of the economic problem

Answer 24

because it involves opportunity cost

Question 25

what is the demand curve drawn on the assumption

Answer 25

Factors affecting demand, other than price, remain constant.

Question 26

what ped does a normal good have

Answer 26

a positive figure that is less that one

Question 27

what ped does an inelastic good have

Answer 27

a value smaller than one (eg 0.5)

Question 28

what ped does an elastic good have

Answer 28

a value greater than one (eg 6)

Question 29

what does it mean when ped is 0

Answer 29

perfectly inelastic

Question 30

what does unitary elastic mean

Answer 30

a change in price results in an equally proportional change in another demand.

(when PED=1)

Question 31

what may happen to revenue if a firm with and inelastic demand increases its prices

Answer 31

revenue is likely to increse

Question 32

what is cross elasticity of demand

Answer 32

Cross elasticity of demand (XED) measures the percentage change in quantity demand for a good after a change in the price of another

Question 33

how to calculate cross elasticity of demand

Answer 33

the change in quantity demanded of good A/ the change in price of good B

Question 34

how can XED help firms

Answer 34

1. if there are no substitutes firms can price their product higher
2. loss leaders- For example, many companies sell printers as cheaply as possible because if they sell a printer, they know the demand for their replacement ink cartridges will increase.

Question 35

what does an XED greater than one mean

Answer 35

strong complements/ substitutes and changes in a price of one good may result in strong changes in QD of another good

Question 36

why may supply be elastic

Answer 36

If there is spare capacity in the factory.

If there are stocks available.

If it is easy to employ more factors of production.

If a product can be sold from the internet which increases the scope of international competition and increases options for supply

Question 37

what does a pes of 0 mean

Answer 37

perfectly inelastic

Question 38

what does a pes of infinity means

Answer 38

perfectly elastic

Question 39

demand

Answer 39

the number of consumers willing and able to buy a good or service at a given price

Question 40

supply

Answer 40

the amount of goods that suppliers are willing and able to sell at a given price