Topic 3: Elasticity

Question 1

Define the Price elasticity of demand

Answer 1

Price elasticity of demand measures the responsiveness of quantity demand to a change in price

Question 2

Ed >1

Answer 2

Elastic eg. Tv

Question 3

Ed < 1

Answer 3

Inelastic eg. Coffess

Question 4

Ed = 1

Answer 4

Unitary elastic

Question 5

Price change/Point method

Answer 5

% change in quantity / % change in price
Q2-Q1/Q1

Question 6

Mid Point Method

Answer 6

change in quantity/ Quantity average x price average / change in price

Question 7

Availability of substitutes

Answer 7

• The greater number of close substitutes a good has the more price elastic demand
• If price of a good rises, and it has many close substitutes, consumers will be sensitive to change as they can easily switch to another product
• Few substitutes would be inelastic (water, petrol)

Question 8

Determinates of price elasticity of demand

Answer 8

• Availability of substitute
• Whether it’s essential or luxury
• Proportion of income spent
• Time
• Definition of market - broad or narrow

Question 9

Luxury or necessity

Answer 9

• necessities ( food) - price inelastic
• Luxury( jewellery, champagne) - elastic

Question 10

Definition of market

Answer 10

• Demand for goods and services in a broader defined market will be more inelastic than demands for goods in. a narrowly defined market

Question 11

The proportion of income spent

Answer 11

• Expensive goods are likely to be price elastic as they take up a large proportion of consumer spending
• Cheaper goods are more price inelastic

Question 12

Time

Answer 12

-If consumers have more time to respond to price change, demand is more price-elastic
- The short run, demand for most commodities is relatively inelastic as they don’t have time to adjust consumption or find substitutes

Question 13

Relationship between total revenue and price elasticity of demand

Answer 13

TR = PXQ
- When elastic it moves in the opposite direction, as price increases , total revenue decrease and when price decreases, total revenue increases.
- When inelastic it moves in the same direction, as price increases, total revenue increases, this is why inelastic goods are subject to taxes
- When unitary elastic - change in price has an impact on total revenue

Question 14

Define price elasticity of supply

Answer 14

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

Question 15

Measurements

Answer 15

Es = % change in quantity supplied / % change in price
Es = change in quantity/quantity average x price average /change in price

Question 16

Steeper the curve

Answer 16

More inelastic, quantity change is much smaller for inelastic goods and much larger for elastic goods

Question 17

Determinates the price elasticity of supply

Answer 17

• Time
• Nature of inventory
• Ability to store inventory

Question 18

Time

Answer 18

• If producers can respond quickly to price change then supply will be price-elastic
• in short, run may be difficult for produces to suddenly increase output, therefore supply will be more price inelastic
• As time increases supply becomes more elastic

Question 19

Nature of industry

Answer 19

• The supply of agricultural products tends to be relatively price inelastic while supply of manufacturing goods is more price elastic
• Manufactured goods are relatively easy to produce

Question 20

Ability to store inventory

Answer 20

• If a producer has the ability to store goods it can respond fairly quickly to a change in demand and so supply in elastic
• Goods that are perishable like fruit can’t be stored therefore supply is inelastic

Question 21

Agricultural market

Answer 21

• Demand relatively inelastic
• Overtime supply increase due to technology improvement

Question 22

Housing market

Answer 22

• Supply is inelastic takes time to build houses
• Demand increases due to rising income and population

Question 23

Tax

Answer 23

Taxes placed on inelastic goods, raise revenue and don’t impact quantity much inelastic