Theory of Elasticity

Question 1

Define PED

Answer 1

It measures the responsiveness of quantity demanded due to a change in price, ceteris paribus

Question 2

‘H’ factor of PED

Answer 2

Habits of consumers
A habitually-consumed good (eg. cigarettes, liquor) will have a more price inelastic demand

Question 3

‘I’ factor of PED

Answer 3

Proportion of income
A higher the proportion of income a good costs, the more price elastic the demand as a rise in price will further sway consumption.

Question 4

‘N’ factor of PED

Answer 4

Degree of necessity
The higher the degree, the more price inelastic the demand as a change in price will lead to a less than proportionate change in quantity demanded.

Question 5

‘T’ factor of PED

Answer 5

Time period
People can overcome their desire for vices consumption over time, or find closer and more substitutes to a good as time passes.

Question 6

‘S’ factor of PED

Answer 6

Number and closeness of substitutes

The more substitutes available or the more substitutable 2 goods are, the more price elastic the demand as consumers can choose to consume more of the other good due to a change in price.

Question 6

‘S’ factor of PED

Answer 6

Number and closeness of substitutes

The more substitutes available or the more substitutable 2 goods are, the more price elastic the demand as consumers can choose to consume more of the other good due to a change in price.

Question 7

Define YED

Answer 7

It measures the responsiveness of demand for a good due to a change in income, ceteris paribus.

Question 8

What does negative YED indicate?

Answer 8

Inferior good
As income levels rise, the demand of inferior goods fall.

Question 9

What does positive YED indicate?

Answer 9

Normal goods
As income levels rise, the demand for normal goods would also increase.

Question 10

Define XED

Answer 10

It measures the responsiveness of demand for a good due to a change in price of another good, ceteris paribus.

Question 11

What does positive XED indicate?

Answer 11

The goods are substitutes

Question 12

What does negative XED indicate?

Answer 12

The goods are complements.

Question 13

Define PES

Answer 13

It measures the responsiveness of the quantity supplied of a good due to a change in price, ceteris paribus.

Question 14

‘S’ factor of PES

Answer 14

Stocks and inventories

Firms would be more responsive to a rise in price of a good by supplying their stocks to the market to reduce prices.

Question 15

‘C’ factor of PES

Answer 15

Spare capacity of firms

Firms are more able to respond to price rises by increasing output.

Question 16

‘E’ factor of PES

Answer 16

Ease of factor mobility and substitutability

The lower the ease, the lower the ability of firms to increase or decrease FOP input into a production from other productions, reducing output. This causes a more price inelastic supply.

Question 17

‘N’ factor of PES

Answer 17

Nature of production process

The more complex a production is, the harder it is to raise output in a short period of time as talents and complicated machineries need to be sourced, causing supply to be price inelastic.

Question 18

‘T’ factor of PES

Answer 18

Time period

In the very short run, firms are almost unable to respond to price changes, causing supply to be perfectly price inelastic.

In the short run, firms can seek to increase spare capacity and increase stocks, causing supply to be price inelastic

In the long run, firms can develop technology or make FOPs more mobile between different productions, causing supply to be more price elastic.