Topic 3: Price Elasticity of Demand

Question 1

what is price elasticity of demand

Answer 1

measure of the responsiveness of quantity demanded to changes in price

Question 2

explain when demand is elastic

Answer 2

• Elastic when % change in quantity demanded is greater than the % change in price
• Quantity demanded highly responsive to change in price

Question 3

explain when demand is inelastic

Answer 3

• Inelastic when the % change in quantity demanded is less than the % change in price
• Quantity demanded relatively unresponsive to changes in price

Question 4

explain when demand is unit elastic

Answer 4

• Unit elastic when the % change in quantity demanded= % change in price
• Quantity demanded responds proportionately to changes in price

Question 5

numerically, when is demand elastic, inelastic or unit

Answer 5

elastic= greater than 1
inelastic= less than 1 
unit= equals one

Question 6

how does availability of close substitutes make a good elastic?

Answer 6

• More close substitutes= more people will switch to cheaper products
• More similar products > more elastic

Question 7

how does time make a good elastic?

Answer 7

• More time passes= opportunity to find alternatives

- Example: moving towards electric cars when petrol price increase

Question 8

how does time make a necessity v luxury elastic

Answer 8

• Necessities= inelastic, while luxuries= elastic (can do without // more responsive)

Question 9

how does time make a good elastic

Answer 9

• Narrowly defined market= more elastic, broadly defined= more inelastic
• Example: demand for food inelastic, demand for ice cream elastic

Question 10

what depends how you calculate ED

Answer 10

whether you’re given percentage change or actual change

Question 11

how do you calculate ED from percentages

Answer 11

point method (basic equation)

• percentage change in QD/ percentage change in P

Question 12

how do you calculate ED from actual change

Answer 12

mid point method

Question 13

formula for mid point

Answer 13

Q2−Q1 × P2+P1

P2 - P1 Q2 + Q1

Question 14

explain when a good is perfectly elastic

Answer 14

ed= infinite

• horizontal curve
• • If price increases even slightly above its current equilibrium, the Qd will fall to zero

Question 15

explain when a good is perfectly inelastic

Answer 15

• Demand curve is vertical

* The same quantity of the good will be demanded regardless of what the price is (%change Qd= 0)

Question 16

formula for revenue

Answer 16

TR= PRICE X QUANTITY

Question 17

In elastic goods, what happens to Q and therefor TR when P is increased

Answer 17

large decrease in Q

= decrease TR

Question 18

In elastic goods, what happens to Q and therefor TR when P is decreased

Answer 18

large increase in Q

= Increase TR

Question 19

In INelastic goods, what happens to Q and therefor TR when P is increased

Answer 19

small decrease in Q

= increase TR

Question 20

In INelastic goods, what happens to Q and therefor TR when P is decreased

Answer 20

small increase in Q

= decrease TR

Question 21

when drawing curve is elastic or inelastic flatter

Answer 21

o Elastic: flatter curve

o Inelastic: steeper curve

Question 22

how is income elastitict of demand denoted

Answer 22

E i

Question 23

how is cross elasticity of demand denoted

Answer 23

Ex

Question 24

how is price elasticity of supply denoted

Answer 24

Es

Question 25

what is income elasticity of demand + formula

Answer 25

- Responsiveness of change in quantity to change in income | %cahgne in Qd/ %change in income

Question 26

are normal goods and inferior positive income elasticise or negative

Answer 26

o Normal goods: higher income raises quantity demanded ♣ Qd and income move in same direction= positive income elasticises o Inferior goods: higher income lowers quantity demanded ♣ Qd and income move opposite directions= negative income elasticities

Question 27

among normal goods, what is the variation in elasticity size

Answer 27

o Necessities= small income elasticities (consumers always buy) o Luxuries= large income elasticities (consumers can do without if income low)

Question 28

what is cross price elasticity + formula

Answer 28

- Responsiveness from change in price of one good, on demand for another good %cahgne in Qd of 1 good/ %change in price of 2nd good

Question 29

if the cross price elasticity is postive=

Answer 29

o Positive Ex: substitutes | ♣ Price of one good moves in same direction as quantity of other good

Question 30

if the cross price elasticity is negative=

Answer 30

o Negative Ex: complements | ♣ Price of one good moves opposite direction as quantity of other good

Question 31

is elasticity of supply calculated the same as demand

Answer 31

yes, either basic formula or mid point

Question 32

if an elastic good falls or rises in price, what is the impact on expenditure

Answer 32

o Fall in price= increase in expenditure | o Increase in price= expenditure decreases

Question 33

if an inelastic good falls or rises in price, what is the impact on expenditure

Answer 33

o Fall in price= decrease in expenditure | o Increase in price= total expenditure increases