Price, income and cross elasticities of demand

Question 1

What is PED?

Answer 1

Price elasticity demand measures the responsiveness of quantity demanded given a change in price.

Question 2

What is the formula of PED and what can you use to remember easily?

Answer 2

PED= %change in QD divided by %change in price. Remember that you queue before you pee.
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Question 3

What is the acronym and factors affecting PED

Answer 3

SPLAT
Substitute number
Percentage of income
luxury/necessity
Addicitve/habbit forming
Time period

Question 4

What do different values of PED indicate?

Answer 4

PED > 1: Elastic demand (quantity demanded changes significantly with price changes).
PED < 1: Inelastic demand (quantity demanded changes little with price changes).
PED = 1: Unit price elastic (percentage changes in quantity and price are equal).

Question 5

How does PED affect Total Revenue?

Answer 5

IF price elastic: p increase will decrease TR but a p decrease will increase TR as more units are being sold despite at a lower price.
IF price inelastic: p increase will increase TR and p decrease will decrease TR

Question 6

What is PES?

Answer 6

Measures the responsiveness of quantity supplied given a change in price

Question 7

What is the equation for PES?

Answer 7

PES = %change in q supplied divided by the % change in price.

Question 8

What is the acronym and factors affecting PES

Answer 8

PSSST
Production log
Stocks
Spare capacity
Sustainability of factors of production
Time

Question 9

what is cross elasticity of demand (XED)

Answer 9

XED measures the responsiveness of quantity demanded for one good to a change in the price of another good.

Question 10

How do you calculate XED?

Answer 10

XED= %change in Qd of A divided by the %change in price of B

Question 11

How do substitute and complementary goods relate to cross elasticity of demand?

Answer 11

Substitute Goods: Positive XED > 0 (demand for one good increases when the price of the other increases).
Complementary Goods: Negative XED < 0 (demand for one good decreases when the price of the other increases).

Question 12

What is Income Elasticity of Demand (YED)?

Answer 12

YED measures the responsiveness of quantity demanded to a change in consumer income.

Question 13

How would you calculate YED?

Answer 13

YED=% ChangeinQuantityDemanded divided by %ChangeinIncome

Question 14

How do normal and inferior goods relate to income elasticity of demand?

Answer 14

Normal Goods: YED > 0 (demand increases as income increases).
Inferior Goods: YED < 0 (demand decreases as income increases).

Question 15

What is a normal good?

Answer 15

Normal goods are products whose demand increases as consumer income rises. Examples include luxury items, branded clothing, and organic foods. As people earn more money, they are likely to buy more of these goods.

Question 16

What is an inferior good?

Answer 16

Inferior goods are products whose demand decreases as consumer income rises. Examples include generic brands, instant noodles, and public transportation. As people earn more money, they tend to buy less of these goods in favour of more expensive or higher-quality alternatives.

Question 17

What business use of PED is there?

Answer 17

Because in employment decisions to determine how wage changes affect hiring, in stock management to predict investor response to price changes, and in output decisions to adjust production levels based on demand fluctuations, all aimed at meeting a significant quantity demanded (Qd).

Question 18

What business use of PES is there?

Answer 18

Find ways to make supply more price elastic so there’s better responsiveness to changes in price .

Question 19

What business use of XED is there?

Answer 19

1) Pricing decisions e.g. reduce price of printers and increase price of ink
2) Non Price Competition - avoiding price war with substitutes
3) Employment - If two goods are substitutes and the price of one increases, firms may hire more employees to produce the substitute good, anticipating higher demand.
4) Stocks - A high positive XED between two goods can signal to investors that increased demand for one product may lead to higher profits for the related company, influencing stock prices positively.
5) Output - Changes in the price of a complementary good can affect the output of another product, as firms may need to adjust production levels to meet the increased demand for the complementary good.

Question 20

What business use of YED is there?

Answer 20

1) pricing decisions
2) Employment - Higher income increases demand for normal goods, leading firms to hire more workers, while demand for inferior goods may decrease, causing layoffs.
3) Stocks - Rising consumer income boosts demand for normal goods, signalling potential profits and attracting investors, which can raise stock prices.
4) Output - Firms increase output for normal goods as incomes rise, anticipating higher demand, while they may reduce output for inferior goods.

Question 21

Evaluation points of elasticity?

Answer 21

1) Elasticity figures only estimate
2) Assume ceteris paribus (other factors affecting elasticity)
3) PED varies along the demand curve