TOPIC 3 - ELASTICITY

Question 1

WHAT IS PED?

Answer 1

MEASURES THE RESPONSIVENESS OF DEMAND TO A CHANGE IN PRICE.

Question 2

WHAT IS PED AND ITS DETERMINANTS?

Answer 2

1. NECESSITY
2. ADDICTIVENESS
3. SUBSTITUTES
4. TIME
5. INCOME
6. QUALITY
7. BRAND LOYALTY

Question 3

WHAT ARE THE DETERMINANTS OF PES?

Answer 3

1. BARRIERS TO ENTRY
2. FACTOR MOBILITY
3. RAW MATERIALS
4. INVENTORY
5. TIME
6. SPARE CAPACITY.

Question 4

WHAT IS ELASTIC DEMAND?

Answer 4

DEMAND IS RESPONSIVE TO A CHANGE IN PRICE. ANY CHANGE IN PRICE LEADS TO A GREATER PERCENTAGE DECREASE IN QUANTITY DEMANDED.

Question 5

WHAT IS INELASTIC DEMAND?

Answer 5

DEMAND IS NOT VERY RESPONSIVE TO A CHANGE IN PRICE. ANY CHANGE IN PRICE LEADS TO A SMALLER PERCENTAGE CHANGE IN QUANTITY DEMANDED.

Question 6

WHAT IS UNITARY ELASTICITY?

Answer 6

PERCENTAGE CHANGE IN QUANTITY DEMANDED EQUALS PERCENTAGE CHANGE IN PRICE.

Question 7

WHAT FIGURES REPRESENTS UNITARY ELASTICITY?

Answer 7

PED OF 1 FOR PES
PED OF -1 FOR PED

Question 8

HOW DO YOU WORK OUT REVENUE?

Answer 8

PRICE x QUANTITY

Question 9

WHAT DOES PERFECTLY ELASTIC DEMAND MEAN?

Answer 9

PED IS INFINITELY NEGATIVE. PURCHASERS WON’T BUY ANY PRODUCT ABOVE A CERTAIN PRICE.

Question 10

WHAT DOES PERFECTLY INELASTIC DEMAND MEAN?

Answer 10

PED IS 0 AS THE SAME AMOUNT IS DEMANDED WHATEVER THE PRICE.

Question 11

WHAT IS PES?

Answer 11

RESPONSIVENESS OF SUPPLY TO A CHANGE IN PRICE.

Question 12

WHAT IS INCOME ELASTICITY OF DEMAND?

Answer 12

RESPONSIVENESS OF DEMAND TO A CHANGE IN INCOME.

Question 13

WHAT IS THE YED OF NORMAL GOODS THAT ARE NECESSITIES?

Answer 13

POSITIVE BUT CLOSE TO 0

Question 14

WHAT IS THE YED OF NORMAL GOODS THAT ARE LUXURIES?

Answer 14

POSITIVE HIGHER NUMERICAL VALUES.

Question 15

WHAT WOULD BE THE YED OF INFERIOR GOODS?

Answer 15

NEGATIVE

Question 16

WHAT IS CROSS ELASTICITY OF DEMAND?

Answer 16

MEASURES RESPONSIVENESS OF DEMAND FOR 1 PRODUCT TO A CHANGE IN PRICE OF ANOTHER PRODUCT.

Question 17

WHAT IS THE XED FOR SUBSTITUTES?

Answer 17

POSITIVE

Question 18

WHAT IS THE XED FOR COMPLEMENTS/ GOODS IM JOINT OR DERIVED DEMAND?

Answer 18

NEGATIVE

Question 19

WHAT IS THE XED FOR UNRELATED PRODUCTS?

Answer 19

0

Question 20

WHAT ARE EXAMPLES OF GOODS WITH INELASTIC PED?

Answer 20

1. CIGARETTES
2. WATER
3. APPLE PRODUCTS

Question 21

WHAT ARE EXAMPLES OF GOODS WITH ELASTIC PED?

Answer 21

1. SOFT DRINKS

Question 22

WHAT ARE EXAMPLES OF GOODS WITH INELASTIC PES?

Answer 22

1. STRAWBERRIES ( LOW INVENTORY)
2. DOCTORS ( HIGH BARRIERS TO ENTRY)
3. ELECTRIC CARS ( LACK OF RAW MATERIALS)

Question 23

WHAT ARE EXAMPLES OF GOODD WITH ELASTIC PES?

Answer 23

1. WAITERS (HIGH FACTOR MOBILITY)
2. ELECTRICITY ( SPARE CAPACITY)
3. DIGITAL DOWNLOADS E.G SONGS ( PERFECTLY ELASTIC)

Question 24

WHAT R NORMAL GOODS?

Answer 24

HAVE A + YED

Question 25

WHAT R INFERIOR GOODS?

Answer 25

HAVE A - YED

Question 26

WHAT DIAGRAM SHOWS THE RELATIONSHIP BETWEEN INCOME AND CONSUMPTION?

Answer 26

ENGEL CURVE

Question 27

WHY DO ENGEL CURVES NOT START FROM THE ORIGIN?

Answer 27

1. EVEN IF INCOME IS LESS THAN 0, PEOPLE STILL PURCHASE NECESSITIES E.G THROUGH BORROWING OR SAVINGS 2. PEOPLE WON'T BUY LUXURIES WHEN INCOME IS LOW 3. DEMAND AND INCOME HAVE AN INVERSE RELATIONSHIP FOR INFERIOR GOODS

Question 28

WHY DOES A FIRM WANT TO REDUCE THE PED 0F ITS PRODUCTS?

Answer 28

PRODUCT BECOMES LESS RESPONSIVE TO A CHANGE IN PRICE SO INCREASING PRICES WOULD BOOST REVENUE. PED OF -0.1 MEANS A 10% PRICE RISE LEADS TO A 1% FALL IN DEMAND (CETERIS PARIBUS)

Question 29

WHY MAY A FIRM WANT TO KNOW THEIR XED?

Answer 29

CAN CALCULATE THE CHANGE IN SALES WHEN A COMPETITOR CHANGES THEIR PRICE E.G IF A SUBSTITUTE BECOMES CHEAPER, THEY BECOME INCENTIVISED TO FOLLOW SUIT/ IF PRICE OF COMPLENTARY GOOD FALLS, THERE IS AN INCENTIVE TO INCREASE PRODUCTION.