section 2

Question 1

What are the factors that determine elasticity of demand?

Answer 1

• S - substitute’s
• P - percentage of income
• L - luxury/necessity
• A - addictive/ habits
• T - time period

Question 1

What does price elasticity of demand(PED) measure and how is it calculated?

Answer 1

• measures the responsiveness in demand given a change in price
• PED: %change in quantity demanded divided by % change in price

Question 2

What does income elasticity of demand(YED) measure and how is it calculated?

Answer 2

• Measures the responsiveness in demand given a change in income
• YED: %change in quantity demanded divided by the % change in income

Question 3

What can the YED result tell you in terms of the type of good and its elasticity?

Answer 3

• positive result: normal good
• negative result: inferior good
• YED>1: elastic
  -YED<1: inelastic

Question 4

What relationship do normal and inferior goods have between income and demand?

Answer 4

• Normal good: positive relationship, as income rises, demand also rises
• Inferior good: Negative relationship, as income rises, demand falls

Question 5

What does cross elastic of demand(XED) measure and how is it calculated?

Answer 5

• XED: measures the responsiveness of quantity demanded of good A given a change in price of good B
• XED: % change in quantity demanded of good A divided by % change in price of good B

Question 6

What can the XED result tell you in terms of the type of good and its elasticity?

Answer 6

• Positive result: substitute good
• Negative result: complementary good
• XED>1: elastic (strongly related)
• XED<1: inelastic(weakly related)

Question 7

What relationships do complementary and substitute goods have between the quantity demanded of good A and the price of good B?

Answer 7

• complementary goods: inverse relationship, Price of A falls, Quantity demanded rises of B
• Substitute goods: Positive relationship, Price of A falls, quantity demanded of B falls

Question 8

What does price elasticity of supply measure anyhow is it calculated?

Answer 8

• PES: Measures the responsiveness of quantity supplied given a change in price

-PES: %change in quantity supplied divided by %change in p

Question 9

What are the factors that determine the elasticity of supply?

Answer 9

• P - production lag
• S - stocks
• S - spare capacity
• S - substitutability of FUP’s
• T - time period

Question 10

What is meant by:

(1)PED>1?
(2)PED<1?
(3)PED=0?
(4)PED=Infinity?
(5)PED=1?

Answer 10

1 - demand is price elastic
2 - demand is price inelastic
3 - demand is perfectly price inelastic
4 - demand is perfectly price elastic
5 - demand in unit elastic