Week 3 - Elasticity

Question 1

Price elasticity of demand (ε)

Answer 1

The measure of how much quantity demanded responds to changes in price.

Question 2

Price elasticity of demand formula (arc elasticity)

Answer 2

ε = | %Δ Quantity demanded / %Δ Price |
It is always positive

Question 3

Values of price elasticity of demand

Answer 3

If ε > 1, demand is elastic - consumers are responsive to price changes.
if ε < 1, demand is inelastic - consumers are unresponsive to price changes.
if ε = 1, demand is unit elastic

Question 4

Perfectly elastic demand

Answer 4

ε = ∞. Demand curve is a straight horizontal line.
Even a small change in price causes a change in demand.

Question 5

Perfectly inelastic demand

Answer 5

ε = 0. Demand curve is a straight vertical line.
Price does not effect demand.

Question 6

Determinants of price elasticity of demand

Answer 6

Availability of substitutes - lots of substitutes will cause a high elasticity of demand.
Proportion of budget - more expensive items that occupy more of your budget tend to be more elastic than cheaper items.
Time - more time means consumers have more chance to change to substitutes or change their behaviour
Addiction/habits - Addictive or habitual goods tend to be inelastic.

Question 7

Arc elasticity

Answer 7

Price elasticity of demand between two points on the demand curve

Question 8

Point price elasticity

Answer 8

Price elasticity of demand at a particular point on the demand curve

Question 9

Point price elasticity formula

Answer 9

|1/slope| × P/Q
Slope - gradient of a line

Question 10

Cross price elasticity of demand (XED)

Answer 10

The percentage change in quantity demanded of a good in response to a 1% change in price of another good.

Question 11

Cross price elasticity of demand formula

Answer 11

ΔQx / ΔPy × Py / Qx

Question 12

Values of cross price elasticity of demand

Answer 12

If XED is positive, the goods are substitutes
If XED is negative, the goods are complements

Question 13

Income elasticity of demand

Answer 13

percentage change in quantity demanded in response toa 1% change in consumers income.

Question 14

Income elasticity of demand formula

Answer 14

%Δ Quantity demanded / %Δ consumer income

Question 15

Values of income elasticity of demand

Answer 15

Income elasticity of demand is positive for normal goods
Income elasticity of demand is negative for inferior goods

Question 16

How is prices and expenditure effected by elasticity of demand

Answer 16

When ε > 1, changes in price and expenditure move in opposite directions - increase in price means decrease in expenditure.
When ε < 1, changes in price and expenditure move in the same direction - increase in price means increase in expenditure.

Question 17

Price elasticity of supply (Es)

Answer 17

The measure of how much quantity supplied responds to changes in price

Question 18

Price elasticity of supply formula (arc elasticity)

Answer 18

Es = %Δ Quantity supplied / %Δ Price
It is always positive

Question 19

Values of elasticity of supply

Answer 19

If ε > 1, supply is elastic - suppliers are responsive to price changes.
if ε < 1, supply is inelastic - suppliers are unresponsive to price changes.
if ε = 1, supply is unit elastic

Question 20

Determinants of price elasticity of supply

Answer 20

Flexibility of inputs - how easy it is to source inputs to increase supply
Mobility of inputs - how easy it is to transport inputs
Ability to produce with substitute inputs
Time - can solve problems with flexibility/mobility/substitution of inputs in the long run.