Section C

Question 1

Elasticity:

Answer 1

A measure of the sensitivity of one variable to changes in another variable

Question 2

PED=

Answer 2

Responsiveness of a QD to a change in P

%change in QD
Divided by
% change in Price

(Quacky Duck sits on a pond)

Question 3

Elasticity numbers:

Answer 3

Perfectly Inelastic: PED= 0

Relatively inelastic: PED = between 0 and 1

Unitary Elastic: PED=1

Relatively Elastic: PED is bigger than 1

Perfectly Elastic: PED= infinity

(NB: PED can also be negative)

Question 4

PED and D curves:

Answer 4

Perfectly inelastic= Vertical Line

Perfectly elastic = Horizontal line

Relatively elastic/inelastic= slightly less extreme but similar line

Question 5

Factors affecting PED

Answer 5

A ddictiveness

L uxury or necessity

I ncome proportion and price

S ubstitutes availible

T ime

Question 6

Significance of PED:

Answer 6

For Firms:
-can set diff prices for diff segments of market (e.g off peak elastic, peak inelastic)

For Govt:

• Estimate tax revenue
• Estimate effect of a subsidy

Question 7

Limitations of PED:

Answer 7

• other factors outside price that might affect QD (PICTS)
• Historical Data
• Unreliable Data

Question 8

Income elasticity of demand (YED) =

Answer 8

Responsiveness of QD to a change in income

% change of QD
Divided by
%change of income

(Quacky duck sits on a yacht)

Question 9

Normal goods:

Answer 9

*Has positive sign

Split into two sections:

Necessity good (YED= between 0 and 1… income inelastic)- QD goes up, but not as much as income

Luxury Good (YED= bigger than 1… income elastic) Spend proportionally more on good

Question 10

Inferior Goods

Answer 10

QD decreases in response to an increase in consumer incomes.

YED= between 0 and -1 its income inelastic (Qd is decreasing proportionally less than increase in income)

YED= bigger than -1 its income elastic (QD is decreasing proportionally more than the increase in income)

Question 11

Significance of YED

Answer 11

Economic growth forecast:

Can focus on luxury goods when incomes are up and inferior goods when incomes are down

Question 12

Limitations of YED

Answer 12

Other factors

Historical data

Unreliable data

Question 13

Cross Price elasticity of demand (XED)

Answer 13

The responsiveness of QD for one good to a change in the price of another good

%change in QD of good X
divided by
%change in price of good y

Question 14

Substitute good

Answer 14

Two goods are said to be substitutes if the demand for one good is likely to rise if the price of the other rises

*positive sign

XED=0-1 its a weak substitute (inelastic)

XED= 1+ its a close substitute (elastic)

Question 15

Complementary goods

Answer 15

Two goods are said to be complements if an increase in the price of one good causes demand for the other good to fall.
*negative sign

XED=0~-1 its a weak compliment (inelastic)

XED=-1+ its a strong compliment (elastic)

Question 16

Significance of XED

Answer 16

Used by firms where there are close substitutes to make price decisions.

Can estimate the effect of a special offer on one of their goods on the demand for the other good

Question 17

Limitations of yed

Answer 17

Other factors

Historical data

Unreliable data

Question 18

Price elasticity of supply (PES)

Answer 18

Responsiveness of quantity supplied to a change in price.

Same elasticity figures and graphs as ped

Question 19

Factors influencing PES

Answer 19

1) Stockpiles
2) Time
3) Production Capacity (spare FOP’s)

Question 20

Significance of PES

Answer 20

Used by firms to see how quickly they can reply to changes in price

• High Pes ( firm can increase output quickly)
• Low Pes (difficult yo increase output quickly)
• firms may try to supply goods that are PES elastic

Question 21

Limitations of PES

Answer 21

• other factors
• unreliable data
• Historical data

Question 22

Elasticity Question checklist:

Answer 22

1) calculate coefficient
2) ID (elastic/inelastic)
3) analyse size and sign
4) factors effecting it
5) significance
6) historical/unreliable/other factors