Theme 1 - elasticity

Question 1

What is elasticity?

Answer 1

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

Question 2

What is price elasticity of demand (PED)?

Answer 2

Show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price, ceteris paribus.

Question 3

What is the difference between price elastic and price inelastic?

Answer 3

Elastic: demand is very responsive to a change in price.
Inelastic: demand is very unresponsive to a change in price.

Question 4

FINISH THE SENTENCE…

If PED<1 it is…

Answer 4

…relatively price inelastic.

Question 5

FINISH THE SENTENCE…

IF PED>1 it is…

Answer 5

…relatively price elastic.

Question 6

FINISH THE SENTENCE…

IF PED=1 it is…

Answer 6

…unitary elastic.

Question 7

What are the uses of PED?

Answer 7

• assess the effects on total revenue of raising or lowering the prices of goods and services.
• when PED is inelastic, an increase in price will increase total revenue, whereas a decrease in price will decrease revenue.
• when PED is elastic, an increase in price will decrease total revenue, whereas a decrease in price will increase total revenue.
• when PED is unitary or 1 there is no effect on revenue.

Question 8

What are the determinants of PED?

Answer 8

• proportion of income that a good costs.
• whether there are close substitutes or not.
• whether the good is habit forming or a necessity.
• time - how long was it since the last change in price?

Question 9

What is income elasticity of demand (YED)?

Answer 9

A measure of the sensitivity of quantity demanded to a change in consumer incomes.

Question 10

What is meant by income elastic?

Answer 10

Demand is very responsive to change in consumer incomes, they are called luxury or superior goods.

Question 11

What is meant by income inelastic?

Answer 11

Demand is very unresponsive to a change in consumer incomes, they are called normal goods.

Question 12

What are inferior goods?

Answer 12

Goods we buy less when our incomes increase.

YED is negative.

Question 13

What are normal goods?

Answer 13

One where the quantity demanded increases as our incomes increase. YED is between 0-1.

Question 14

What are superior goods?

Answer 14

One for which YED is positive and greater than 1, as incomes rise consumers spend proportionally more on the good.

Question 15

What is cross elasticity of demand (XED)?

Answer 15

A measure of the sensitivity of quantity demanded of a good or service to a change in the price of some other good or service.

Question 16

What are the results of XED?

Answer 16

Positive: goods are substitutes e.g. Pepsi and coke.
Negative: goods are compliments e.g. tv and tv remote.
Zero: there is no relationship between goods.

Question 17

What price elasticity of supply (PES)?

Answer 17

A measure of the sensitivity of quantity supplied of a good or service to a change in the price of the good or service.

Question 18

FINISH THE SENTENCE…

If PES is greater than 1 the firm will find it…

Answer 18

…easy to respond to a price change.

Question 19

What are the influences on PES?

Answer 19

• time
• weather
• access to specialist equipment
• government restrictions
• stocks
• spare capacity