Topic 3: Elasticities

Question 1

How do you calculate price elasticity of demand? (PED)

Answer 1

Price Elasticity of Demand = % of change in quantity demanded / % of change in price.

Question 2

How do you calculate price elasticity of supply? (PES)

Answer 2

Price Elasticity of Demand = % of change in quantity demanded / % of change in price.

Question 3

How do you calculate income elasticity of demand? (YED)

Answer 3

Income elasticity of demand = % change in demand / % change in income.

Question 4

How do you calculate cross price elasticity? (XED)

Answer 4

Cross price elasticity = % change in quantity demanded (good x) / % change in price (good y)

Question 5

How do you calculate % change?

Answer 5

Difference / original X 100

Question 6

Define “PED”?

Answer 6

Price elasticity of demand measures the responsiveness of demand to changes in price. How much will demand change?

Question 7

Define “PES”?

Answer 7

Price elasticity of supply measures the responsiveness between change of quantity supplied to changes in price

Question 8

Define “YED”?

Answer 8

Income elasticity of demand measure the responsiveness of quantity demanded to changes in disposable income.

Question 9

Define “XED”?

Question 10

What factors determine the PED of a product?

Answer 10

1. Number of close substitutes available for consumers.
2. Addictive / Habitual consumption.
3. Luxury v Necessity.
4. Proportion of income spent

Question 11

Why does PED vary along a linear demand curve?

Answer 11

At higher prices, lower prices means it will have a elastic price response. At lower prices, higher prices means it will have a inelastic price response,