Test 2 - Market Efficiency and Elasticity

Question 1

What is Elasticity of Demand?

Answer 1

Elasticity of demand refers to the responsiveness of the change in quantity demanded in relation to (change in) price. Demand Curve

Question 2

What is elastic demand?

Answer 2

Elastic demand occurs when the change in a product’s quantity demanded is proportionally greater than a change in price. It is usually represented by a “flatter” demand curve.

Question 3

What is inelastic demand?

Answer 3

Inelastic demand occurs when the change in a product’s quantity demanded is proportionally less than a change in price. It is usually represented by a “taller” supply curve with an I shape.

Question 4

Determinants of Price Elasticity of Demand (PED)

Answer 4

• The availability of substitutes
• Whether it is a luxury or necessity
• Time (In the short term, products are more inelastic; over time more elastic because more substitutes are found.
• Proportion of Income spent (a good that was a lower proportion of income tends to be inelastic).

Question 5

What is Perfect Inelastic demand?

Answer 5

If a change in price results in no change to quantity demanded, the Coefficient = 0 (perfectly inelastic)

Question 6

What is Perfect Elastic demand?

Answer 6

If a change in price results in infinitely large change in quantity demanded, the ED = ∞ (perfectly elastic)

Question 7

What is Unitary Elasticity of demand?

Answer 7

When the coefficient is 1, it is called Unitary Elasticity. Price change is proportional to Quantity demanded change.

Question 8

What coefficient range is relatively inelastic in demand?

Answer 8

Less than 1

Question 9

What coefficient range is relatively elastic in demand?

Answer 9

More than 1

Question 10

How to calculate PED?

Answer 10

percent change in quantity / percent change in price

Change in Quantity x Original Price / Original Quantity x Change in Price

Question 11

How is the Mid-Point method different to point method of demand?

Answer 11

The mid-point method is very similar to the point methods. The only difference is, instead of using the original price, we use the average price. Instead of using the original quantity, we use the average quantity.

Question 12

What is Total Revenue (TR), Formula

Answer 12

Total Revenue refers to the total amount of income business or firms gain from selling a good or service. TR = P x QD

Question 13

Does a Business want to sell more demand elastic or demand inelastic goods? How does this affect Total Revenue?

Answer 13

A business wants to sell more inelastic goods. This means that consumers will not react as much to an increase in price. This will increase revenue and profit.

Question 14

What is Price Elasticity of Supply?

Answer 14

The responsiveness of the quantity supplied of a good or service by producers to a change in the good or service’s prices. Supply of curve

Question 15

What can producers do if supply of a product is inelastic; elastic?

Answer 15

If supply is inelastic, producers will struggle to change production in a given time. If supply is elastic, producers can increase output without a rise in cost or a time delay.

Question 16

If price is elastic >1, what is the effect on suppliers and what is an example of a supply elastic good?

Answer 16

Sellers are sensitive to a price change, Manufactured goods.

Question 17

If price is inelastic <1, what is the effect on suppliers and what is an example of a supply inelastic good?

Answer 17

Sellers are not sensitive to a price change, Agricultural goods.

Question 18

Unitary Supply Elasticity?

Answer 18

Unitary Supply of Elasticity is 1. Price and Quantity supplied change is exactly the same proportion.

Question 19

Perfect Supply Inelastic and what is an example of a perfectly supply inelastic good.

Answer 19

A change in price has no effect on quantity supplied. Rare, valuable 1:1 goods.

Question 20

Determinants of Price Elasticity of Supply

Answer 20

• Ability to store inventory
• Nature of industry
• Time

Question 21

Time Determinant

Answer 21

If the producer can respond quickly to a price change, then supply will be price elastic. If inventories are low, this may be hard to do. As time increases the supply of goods tend to become more elastic due to an increase in the factors of production

Question 22

Nature of Industry Determinant

Answer 22

The supply of agricultural products is quite inelastic, while the supply of manufactured goods is usually more elastic. Agricultural products take a long time to produce, they cannot respond quickly to price changes. Manufactured goods on the other hand are relatively easy to produce and can make changes to production faster.

Question 23

Ability to store inventory determinant.

Answer 23

Inventories refer to stocks that a producer keeps stored for future sales. If a producer has the ability to store its goods, then it can respond fairly quickly to a change in demand (price) and so supply would be elastic.

Question 24

Price Discrimination and how can businesses use this tactic?

Answer 24

Different consumer groups have different price elasticity of demand for the same products. Businesses can use this information to charge different prices and increase their total revenue.

Question 25

Price discrimination definition

Answer 25

Price discrimination is a practice when businesses charge different prices for different demographics, situations, or times for the same product depending on their elasticity to price changes.

Question 26

GST

Answer 26

10% Australia

Question 27

Excise taxes

Answer 27

Extra taxes on other good such as petrol, alcohol and Tobacco. Inelastic goods.

Question 28

Tax Effect on Producer and effect on supply?

Answer 28

A tax is a cost to the producer highest cost. It is shown by a decrease and shift leftwards of supply. The amount of the tax is the size of the supply shift.

Question 29

Tax implementation: Price change, Tax Amount, New Quantity (change size), What do producers receive after, Government tax revenue amount.

Answer 29

Original Price P1, new price with tax amount P2

Vertical distance between two supply curves is tax amount (P2 - P3)

New quantity is at Q2 (leftwards shift), Not much due to being inelastic.

Producers receive P3, should’ve been P1 without tax.

Government tax revenue can be calculated by (P2-P3) x (Q2) - L*W of the tax amount box to find area of rectangle.

Question 30

How does Inelastic or Elastic Tax graph Supply Curve?

Answer 30

Demand Curve shape changes.

Question 31

What is Market Efficiency?

Answer 31

Market Efficiency is producing goods and services that the society wants at the lowest possible cost.

Question 32

Efficient market impact on societal wellbeing. Inefficient market impact on societal wellbeing.

Answer 32

In an efficient market, it is not possible to make someone better off without making someone else worse off. Conversely, when an outcome is inefficient, it is possible to improve total well-being in society by reallocating resources.

Question 33

What does a demand curve represent?

Answer 33

A demand curve is a willingness to pay curve. It reflects the maximum price that a consumer will pay for a good.

Question 34

What is a consumer surplus definition

Answer 34

It is the difference between what a consumer is prepared to pay and what they actually pay in the market.

Question 35

Consumer Surplus area

Answer 35

Consumer Surplus is the area above the original price but below the demand curve.

Question 36

What does Consumer surplus measure?

Answer 36

Measure of economic wellbeing for consumers. Consumers are better off because they pay less and consumer more.

Question 37

What does the Supply Curve represent?

Answer 37

The supply curve represents the minimum price that producers are willing to sell their products (cost of production - price willing to accept)

Question 38

Producer surplus definition

Answer 38

Producer surplus is the difference between what a producer is willing to receive and what they actually receive.

Question 39

Producer Surplus area

Answer 39

It is the area that is below the price, and above the supply curve.

Question 40

What does producer surplus measure?

Answer 40

• An increase in producer surplus means that the producer is better off – there economic welfare has increased.
• Producers are better off because they receive more and can supply more.

Question 41

Total Surplus Definition

Answer 41

• The sum of PS and CS is referred to as total surplus.
• Total surplus is a measure of net benefits to society from the production and consumption of a good.

Question 42

Aim of Society in reference to Market efficiency related to Total Surplus

Answer 42

The aim of society and efficient markets is to maximize the total surplus in every market.

Question 43

Total Surplus Maximisation in reference to use of resources?

Answer 43

If we allocate and use resources so that total surplus is maximized in each market, then we are using the economy’s resources in the most efficient way only at equilibrium point.

Question 44

Dead Weight Loss

Answer 44

DWL (Deadweight Loss) - Refers to lost total surplus.