Theme 1 - Elasticities of demand 1.2

Question 1

What does PED mean?

Answer 1

Th responsiveness of demand to a change in price

Question 2

What is the formula for PED?

Answer 2

% change in QD / % change in price

Question 3

If PED is perfectly elastic, what will be the coefficient?

Answer 3

The coefficient will = infinity. This is because if the price was to remain the same or increase, this would mean demand is the same but, if price decrease at all, this will decrease demand to 0

Question 4

If PED is relatively elastic, what will be the coefficient?

Answer 4

The coefficient will be between -1 and infinity. This means that if the price was to increase, demand will increase by a greater amount

Question 5

If PED is perfectly inelastic, what will be the coefficient?

Answer 5

The coefficient will be between 0. If the price was to change, the quantity demanded would not be affected so a firm can charge as high of a price as they wanted

Question 6

If PED is relatively inelastic, what will be the coefficient?

Answer 6

The coefficient is between 0 and 1. If price was to change, demand will change but by a lesser amount than price

Question 7

What are some determinants of PED?

Answer 7

Substitutes, time and the definition of the market

Question 8

How are substitutes a determinant of PED?

Answer 8

The number of goods that are available to be substituted within the good can determine PED. This is because if a good has multiple close substitutes, then it is more likely to be elastic as demand is quite responsive.

Question 9

How is time a determinant of PED?

Answer 9

In the short run products are likely to be fairly price inelastic because people may find it hard to change their buying habits but, in the long-run, products are likely to be very elastic because people base buying habits on market conditions.

Question 10

How is whether the necessity or luxury of a good a determinant of PED?

Answer 10

If a good is necessity, it is more likely to be inelastic because demand cannot change if it is needed
If a good is a luxury, it is more likely to be elastic because demand will change if income is low for eg.

Question 11

What is income elasticity of demand?

Answer 11

YED is a measure of the responsiveness of demand to a change in income

Question 12

What is a normal and inferior good?

Answer 12

Normal good - when income increases, demand increases (positive)
Inferior good - When income increases, demand decreases (negative)

Question 13

What are the two types of normal goods?

Answer 13

Luxury - YED greater than 1

Necessities - YED 0 and 1

Question 14

What is the formula for YED?

Answer 14

% change in QD / % change in income

Question 15

What is cross-elasticity of demand?

Answer 15

A measure of responsiveness of demand for one good (x) to change in price of another good (y).

Question 16

What is the formula for XED?

Answer 16

% change in qd for good x / % change in price of good y

Question 17

What is the XED coefficient of a good being cross-price inelastic?

Answer 17

<0 (negative) - complements

Question 18

What is the XED coefficient of a good being cross-price elastic?

Answer 18

0> (positive) - substitutes

Question 19

What does it mean for XED being 0

Answer 19

A change in good x will have no impact on the demand for good y

Question 20

What is the acronym that shows the determinants of elasticities of demand

Answer 20

Substitutes 
Percent in income
Luxury/necessity
Addictive/habit
Time

Question 21

What does indirect taxes and subsidies have on PED?

Answer 21

If a good has an inelastic PED than is likely demand will not decrease majorly compared to if it as elastic

Question 22

Changes in real income on PED?

Answer 22

If real income decreases, goods are likely going to be more elastic because people are going to find substitutes that are cheaper. If real income increases, goods likely inelastic and luxuries

Question 23

What impact does an elastic PED have on revenue?

Answer 23

Prices will rise causing total revenue to fall and vice versa

Question 24

What impact does inelastic PED have on revenue?

Answer 24

A rise in price will cause total revenue to rise and vice versa

Question 25

What is the formula for calculating revenue?

Answer 25

No of units sold x selling price

Question 26

What is unitary elasticity?

Answer 26

This is where PED = 1 because demand will change by the exact same percentage as price