Topic 3 - Factors affecting price elasticity

Question 1

The number of close substitutes?

Answer 1

The more close substitutes there are in the market, the more elastic is demand as consumers find it easy to switch. E.g Air travel and train travel are weak substitutes for inter-continental flights but closer substitutes for for journeys of around 200-400km. e.g between major cities in a large country

Question 2

The cost switching between products means ?

Answer 2

There may be costs involved in switching due to demand trends to be inelastic.

Question 3

The degree of necessity or whether the good is a luxury?

Answer 3

Necessities tend to have an inelastic demand whereas elastic demand is more luxury

Question 4

The proportion of a consumer’s income allocated to spending on goods ?

Answer 4

Products that take up a high % of income will have a elastic demand

Question 5

Whether the good is a subject to habitual consumption?

Answer 5

Consumption becomes less sensitive to the price of the good if they are purchasing due to habit
SMOKING

Question 6

Pure competition ?

Answer 6

A theoretical model of perfect competition

Question 7

Monopolistic competition ?

Answer 7

Many small firms in the industry

Question 8

Oligopoly ?

Answer 8

A small number of large firms dominating the industry

Question 9

Monopoly ?

Answer 9

Only one producer in the industry

Question 10

Governement intervention in the market place

Answer 10

When markets do not produce the desired outcomes it called market failure.

Question 11

What are the types of price interventions ?

Answer 11

Price ceiling and price floor

Question 12

What is price ceiling?

Answer 12

The maximum price that can be charged for a product

( REF TO PAGE 13)

Question 13

What is price floor?

Answer 13

The minimum price that can be charged for a product

Question 14

PRICE AND QUANTITY INTERVENTIONS

Answer 14

………

Question 15

1. Market price is too high. What is the Gov action and outcome ?

Answer 15

Price ceiling is the gov action and reduces price, quantity shortage (disequilibrium) is the outcome

Question 16

2. Market price is too low. What is the Gov action and outcome ?

Answer 16

Price floor is the gov action and increases price, quantity excess (disequilibrium) is the outcome

Question 17

3. Market quantity is too high? What is the Gov action and outcome ?

Answer 17

Taxes is the gov action and increases the equilibrium price, reduces equilibrium quantity is the outcome.

Question 18

4. Market quantity is too low? What is the Gov action and outcome ?

Answer 18

Subsidies is the gov actions and reduces equilibrium price, increases equilibrium quantity