Price Elasticity

Question 1

a) PED < 1

b) PED > 1

Answer 1

a) Price Inelastic. Increase Px, less than proportionate decrease Qd
b) Price Elastic. Increase Px, more than proportionate decrease Qd

Question 2

PED Determinants

Answer 2

TIN CAN

Time period (Longer, more price elastic) -> Subsitutes likely found

Income (Proportion of … spent)

• Larger -> Price elastic
• Smaller -> Price inelastic

Nature of good

• Basic (Habitual) –> Price inelastic
• Non-basic (Luxuries) –> Price elastic

Closenss And Number of substitues

• More subs –> Price elastic
• Less subs –> Price inelastic

Question 3

(Application of PED) Impact on TE/TR

Answer 3

1. Draw diagram (Elastic/Inelastic)
2. Explain PED (Elastic/Inelastic)
3. Area A > Area B (Explain both areas)
4. Affect on TE/TR

Question 4

a) PES < 1

b) PES > 1

Answer 4

a) Price inelastic. Increase Px, less than proportional increase Qss
b) Price elastic. Increase Px, more than proportional increase Qss

Question 5

PES Determinants

Answer 5

SCENT

Stock + Inventories

Capacity of firm

Ease of FOP
- More mobility,availability, substitution –> Price elastic

Nature of good

Time period (No. of FOP varied)

• Short run –> Price inelastic
• Long run –> Price elastic

Question 6

(Application of PED&PES) Drawing diagram for distribution of tax/subsidy

Answer 6

1. Draw normal diagram (1DD, 2SS)
2. Draw box of tax/subsidy and new equilibrium

3a. Tax –> Consumer’s tax burden above old eqm price
3b. Subsidy –> Consumer’s benfit below old eqm price
(Consumers pay diff. in price)

Question 7

(Application of PED&PES) Distribution for tax/subsidy (Golden rule?)

a) PED > PES
b) PES > PED

Answer 7

Impact of tax/subsidy greater on side of mkt that is relatively less price elastic.

a) Producer share > Consumer share
b) Consumer share > Producer share

Question 8

Limitations of elasticity

Answer 8

Ceteris Paribus does not hold in reality

Elasticity values estimate (Sample size)