S1 - quantitative demand analysis

Question 1

what is elasticity

Answer 1

measures the responsiveness of a percentage change in one variable resulting from a percentage change in another variable
= % change in Q / % change in P
For a function - dQ/dP x P/Q
Positive or negative
> 1 then Q is highly responsive to changes in P

Question 2

what is own price elasticity of demand

Answer 2

dQxd/dPx x Px/Qxd
>1 = elastic
< 1 = inelastic
= 1 = unitary elastic

Question 3

what is the total revenue test

Answer 3

elastic = price increase leads to decrease in revenue
Inelastic = price increase leads to increase in revenue
Unitary elastic = revenue is maximised

Question 4

what factors affect own price elasticity

Answer 4

availability of consumption substitutes - more subs, more elastic
Time of purchase horizon - more inelastic in short term. Time to react = more elastic
Expenditure share of consumers budgets - essential is inelastic

Question 5

what is cross price elasticity

Answer 5

responsiveness of a percent change in demand for good x due to a percent change in the price of good y
dQxd/dPy x Py/Qxd
>0 = substitutes
<0 = complements
=0 = independent

Question 6

what is income elasticity

Answer 6

responsiveness of a percent change in demand for good x due to a percent change in income
dQxd/dM x M/Qxd
>0 = normal
Between 0 and 1 = necessary
>1 = luxury
<0 = inferior

Question 7

what are elasticities for linear demand functions

Answer 7

own price elasticity = ax x Px/Qx
Cross price elasticity = ay x Py/Qx
Income elasticity = am x M/Qx

Question 8

what are elasticities for non linear demand functions

Answer 8

Qx = A.Pxbx.Pyby.MbmConstant elasticity model - elasticities do not vary with prices or income
Take natural log to make it linear
lnQxd = B0 + BxlnPx + BylnPy + BmlnM own price elasticity = Bx
Cross price elasticity = By
Income elasticity = Bm