Random Microeconomics

Question 1

Definition of PED

Answer 1

PED is the responsiveness of quantity demanded given a change in price.

Question 2

Why is PED always negative

Answer 2

Law of demand

Question 3

Classifications of PED

Answer 3

• If PED is less than 1 demand is price inelastic
• If PED is greater than 1 demand is price elastic
• If PED is equal to 0 then demand is perfectly price inelastic
• If PED is infinite than demand is perfectly price elastic
• If PED is 1 demand is unit price elastic.

Question 4

What are the determinents of PED?

Answer 4

• Substitutes - the more substitutes the more price elastic a good is going to be.
• Percentage of income - the greater the % of income a good/service takes the more price elastic it is.
• Luxury/necessity - if a good is a necessity it is price inelastic demand.
• Addictive - if a good is addictive more price inelastic
• Time Period - in the short-run price inelastic and few subsititutes available –> consumers do not have time to look for substitutes…

Question 5

Why is PES always positive?

Answer 5

Law of supply

Question 6

What is the impact of PED on revenue?

Answer 6

• If PED is price inelastic a fall in price decreases total revenue wheras an increase in price increases total revenue.
• If PED is price elastic a fall in price increases total revenue whereas an increase in price decreases total revenue.

Question 7

What are the classifications of PES?

Answer 7

(same as PED)

Question 7

What is the definition of PES

Answer 7

PES measures the responsiveness of quantity supplied given a change in price

Question 8

What are the determinents of price elasticity of supply?

Answer 8

• Production lag - the longer it takes to produce, the more price inelastic supply - very hard to respond to changes in demand.
• Stocks - the larger the level of stock the easier it is to respond to a change in price or increase in demand.
• Spare capacity - the more spare capacity the more price elastic supply is.
• Substitutiability of FOP
• Time - in the short-run supply is more price inelastic - explain.

Question 9

What is the definition of cross elasticity of demand?

Answer 9

XED measures the responsiveness of quantity demanded for good x to a change in price of good y.

Question 10

What is the formula for XED?

Answer 10

percentage change in quantity demanded of good A/percentage change in price of good B.

Question 11

What does it mean if XED coefficent is positive

Answer 11

Substitute

Question 12

What does it mean if XED coefficient is negative

Answer 12

Complement

Question 13

What are the classifications of XED?

Answer 13

• if XED is greater than 1 then demand between the goods is price elastic (strongly related)
• if XED is less than 1 demand between the goods is price inelastic (weakly related)
• If XED is 0, demand is perfectly price inelastic - no relationship.

Question 14

What is the definiton of YED

Answer 14

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

Question 15

What does it mean if YED coefficient is positive or negative?

Answer 15

Positive = normal good
Negative = inferior good

Question 17

What is demand?

Answer 17

Demand is the quantity of a good or service that buyers are willing and able to buy at a given price.

Question 18

What is supply?

Answer 18

Supply is the quantity of a good or service that sellers are willing and able to sell at a given price.

Question 19

What are the factors that affect demand?

Answer 19

• Income
• Price of other goods
• Tastes & Preferences
• Expectations of future prices
• Population change

Question 20

What are the factors that affect supply?

Answer 20

• Anything that affects the cost of production
• Regulation
• Firms entering/leaving the market
• Availability of new technology
• Anything that makes it easier or cheaper i.e more profitable
• More suppliers
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