Theme 1: Elasticities

Question 1

What is the definition of price elasticity of demand?

Answer 1

How responsive demand is to a price change

Question 2

Give the formula for PED

Answer 2

% Change in qd/% change in p

Question 3

What is meant by price elastic demand?

Answer 3

Demand is very responsive to price changes

Question 4

What values constitute price elastic demand?

Answer 4

-1 to infinity

Question 5

Draw a price elastic and demand curve

Question 6

What is meant by perfectly price elastic demand?

Answer 6

Where the price stays the same no matter the quantity demanded

Question 7

What values constitute perfectly elastic demand?

Answer 7

Infinity

Question 8

Draw a perfectly elastic demand curve.

Question 9

What is meant by price inelastic demand?

Answer 9

Where quantity demanded is quite unresponsive to a change in price

Question 10

What values would constitute price inelastic demand?

Answer 10

Between 0 and -1

Question 11

Draw a price inelastic demand curve

Question 12

What is meant by unit elastic demand?

Answer 12

Where quantity demanded changes by the same percent as price

Question 13

What values constitute unit elastic demand?

Answer 13

-1

Question 14

Draw a unit elastic demand curve

Question 15

Give 3 factors which influence the PED of a product

Answer 15

Number of close substitutes, habit, percentage of income

Question 16

What is the definition of cross price elasticity of demand?

Answer 16

How a price change in good A changes the QD of good B

Question 17

Give the formula for XED

Answer 17

% Change in qd of good a/ change in price of good b

Question 18

What is the definition of substitute goods?

Answer 18

Two similar goods that consumers replace with one another.

Question 19

What values of XED would constitute a substitute good?

Answer 19

Positive values

Question 20

What is the definition of complementary goods?

Answer 20

Goods that are used together

Question 21

What values of XED would constitute complementary goods?

Answer 21

Negative values

Question 22

What would a XED of zero indicate?

Answer 22

The goods are unrelated

Question 23

What is the definition of income elasticity of demand?

Answer 23

How responsive quantity demanded is to a change in income

Question 24

Give the formula for YED.

Answer 24

% Change in QD / % change in Income

Question 25

What is the definition of an inferior good?

Answer 25

A good whose demand increases when income decreases eg - own brand items

Question 26

What values of YED would constitute an inferior good?

Answer 26

Negative values

Question 27

What is a Normal good?

Answer 27

A good whose demand increases when income increases

Question 28

What values of YED would constitute a normal good?

Answer 28

Positive values

Question 29

What is the definition of a luxury good?

Answer 29

A good for which demand increases more elastically as income increases

Question 30

What values of YED would constitute a luxury good?

Answer 30

1 to infinity

Question 31

What is another term for a luxury good?

Answer 31

Upmarket good

Question 32

What is the term for a normal good which isn't a luxury good?

Answer 32

Necessary good

Question 33

Why do firms need to know the price elasticity of demand for their products?

Answer 33

If inelastic, they should increase the price but if elastic they should decrease the price

Question 34

Under what circumstances would an increase in price increase the revenue genned from a product?

Answer 34

If the good is inelastic

Question 35

Under what circumstances would an increase in price decrease the revenue gained from a product?

Answer 35

If the good is elastic

Question 36

Under what circumstances would an increase in price leave revenue unchanged?

Answer 36

If the good is unitary

Question 37

Why do firms need to know the cross price elasticity of demand for their products?

Answer 37

To know whether their good is a substitute or complement to a specific good

Question 38

Why do firms need to know the income price elasticity of demand for their products?

Answer 38

To know whether their good is a normal or inferior good

Question 39

Under what circumstances would a recession increase the sales of a product?

Answer 39

If its an inferior good

Question 40

What is the definition of price elasticity of supply?

Answer 40

How responsive supply is to a change in price

Question 41

Give the formula for PES

Answer 41

% change in QS/ % change in price

Question 42

What is meant by price elastic supply?

Answer 42

Where supply is very responsive to changes in price

Question 43

What values would constitute price elastic supply?

Answer 43

Greater than 1

Question 44

Draw a price elastic supply curve

Question 45

What is meant by perfectly price elastic supply?

Answer 45

Quantity supplied is very responsive to price changes meaning if the price changes there will be no more supply

Question 46

What values would constitute perfectly elastic supply?

Answer 46

Infinity

Question 47

Draw a perfectly elastic supply curve

Question 48

What is meant by price inelastic supply?

Answer 48

Supply is unresponsive to price changes

Question 49

What values would constitute prize inelastic supply?

Answer 49

Between zero and one

Question 50

Draw a price inelastic supply curve

Question 51

Give factors which influence the PES of a product (TEASS)

Answer 51

Time, State of economy, Availability of FOPs, spare capacity, stocks and perishability

Question 52

What is meant by perfectly price inelastic supply?

Answer 52

No matter how much the price changes quantity supplied doesn't change

Question 53

What values would constitute perfectly inelastic supply?

Answer 53

0

Question 54

Draw a perfectly inelastic demand curve

Question 55

What is the economic definition of the long run?

Answer 55

The period of time in which at least one factor of production is fixed

Question 56

Why is PES more elastic in the long run?

Answer 56

Because firms have time to increase capacity