Uses Of Elasticities Of Demand

Question 1

Factors that influence the price elasticity of demand

Answer 1

Substitutes

Type of good or service

Percentage of income spent on good

Time

Question 2

Substitutes

Answer 2

The more substitutes a good has the more price elastic demand is.

Question 3

Type of good (or service)

Answer 3

Demand for essential items is price inelastic.

Non essential price elastic.

Habit forming goods price inelastic.

Purchases that cant be postponed price inelastic

Demand for product with different uses price inelastic.

Question 4

Percentage of income spent on good

Answer 4

Demand for products that require large proportion of consumers income more price elastic.

Question 5

Time

Answer 5

Long run demand becomes more price elastic

Habits change

Easier to change to alternatives time to look at what’s available.

Question 6

Elasticity changes along

Answer 6

A straight demand curve

Question 7

Explain elasticity changes along a straight line demand curve

Answer 7

PED changes from minus infinity at high price/zero demand

Through an elasticity of minus one at the midpoint

To an elasticity of zero at 0 price/high quantity demanded

Question 8

When it total revenue maximised on a demand curve

Answer 8

When the PED = -+1

The nearer a firm sets a products price to the midpoint of demand curve the higher the total revenue will be.

Diagram on p20 if needed.

Question 9

If good has elastic demand then

Answer 9

A reduction in price will increase the firms total revenue.

An increase in price will reduce the firms total revenue

Question 10

If a good had inelastic demand

Answer 10

A reduction in price will reduce a firms total revenue

An increase in price will increase a firms total revenue

Question 11

Income elasticity of demand is different

Answer 11

For normal and inferior goods.

Question 12

YED for normal goods.

Answer 12

Positive YED so between 0 and 1.

As income rises, demand increases.

Question 13

YED for luxury goods

Answer 13

Elastic

YED>1

Question 14

YED of inferior goods

Answer 14

Negative YED

YED<0

As income rise, demand falls.

Question 15

Cross elasticity of demand is used to show

Answer 15

If goods are substitutes or complements.

Closer the substitute the higher the positive XED

Goods with XED of 0 are independent unrelated goods.

Question 16

Knowledge of Elasticities of demand is useful for

Answer 16

Firms and governments.

Question 17

Usefulness of Elasticities of demand

Answer 17

YED sales forecasting

YED pricing policy

Products with different YEDs for stability of a firm

Knowing XED useful to react to changes in price of related products to maximise demand of theirs.

Useful for gov to know how demand for goods might change during booms and recessions for their policies.

Question 18

YED for sales forecasting

Answer 18

If YED and likely changes in income are known than sales levels can be predicted.

Question 19

YED pricing policy

Answer 19

A reduction in price for a normal good,

when there’s an expected fall in incomes,

may limit the expected reduction in demand for the good.

Question 20

Firm wants to stay stable

Answer 20

Can be achieved with products with different YEDs

During boom demand for products with high YEDs increase.

Firms may also supply products with low YED so can still earn revenue in recession.

Question 21

Why is it useful for a firm to know XEDs of their goods?

Answer 21

It will tell them how to react to changes in the price of related products to ensure they maximise demand for their products.

Question 22

Elasticites of demand useful for gov because

Answer 22

Demand for goods might change during booms and recessions.

So useful to know when setting their policies.