Week 8 - Surplus and Elasticity

Question 1

What is economic welfare?

Answer 1

It is the benefits gained from the allocation of resources.
It is measured through consumer and producer surplus.
CS + PS are maximised at the market equilibrium

Question 2

What is consumer surplus?

Answer 2

It is the difference between the total amount that consumers are willing and able to pay and the total amount they actually pay.

Question 3

What is producer surplus?

Answer 3

It is the difference between the price the producers are willing and able to supply a product for and the price they actually receive.

Question 4

What does the term Deadweight loss (DWL) mean?

Answer 4

When the government imposes either a price floor or ceiling price, it can reduce the quantity traded in the market. Resulting in a loss of economic welfare (i.e. loss of consumer and/or producer surplus).

Question 5

What is elasticity of demand?

Answer 5

How much will the quantity demanded change as a result of a price increase or decrease.

Question 6

What is elasticity?

Answer 6

It is a measure of hum much one economic variable responds to a change in an other economic variable.

Question 7

What makes a product inelastic?

Answer 7

It is were consumers will continue to buy it even after a change in the price.

Question 8

What makes a product elastic?

Answer 8

It is when the product is either unnecessary or can be easily replaced with a substitute.

Question 9

What is the “price elasticity of demand”? What is the formula?

Answer 9

How much the quantity demanded responds to a price change.

% change in quantity / % change in price.

Question 10

Describe what is meant by unit elasticity?

Answer 10

The product is not that responsive to a change in price.

Example - price increase of 1% and quantity falls by 1% - therefore total revenue remains the same.

Question 11

Describe what is meant by relatively elastic?

Answer 11

Product is responsive to the change in price.

Example - Price increase of 1% and the quantity falls by more than 1% - therefore total revenue is less.

Question 12

Describe what is meant by relatively inelastic?

Answer 12

Product is unresponsive to the change in price.

Example - Price increase by 1%, but quantity decreases by less than 1%

Question 13

What are the measurements of elasticity?

Answer 13

> 1 (greater than 1) - relatively elastic
<1 (less than 1) - relatively inelastic
= 1 (equal 1) - unit elastic

Question 14

Determinants of a products elasticity?

Answer 14

1. Substitutes available. (High elasticity)
2. Higher share of consumer spending (higher the elasticity)
3. Goods with a derived demand (i.e. petrol) (less price elastic)
4. Long-run elasticity higher than short-run (i.e. petrol)(long-run elasticity greater than short-run)

Question 15

What is cross-price elasticity? The formula and measurements?

Answer 15

Measures the quantity of demand for one product when the price for another product changes

% change in quantity of good / % change in price of ANOTHER good.

If elasticity of demand (e) is greater than 0 = then the goods are substitutes

If elasticity of demand (e) is less than 0 = then the goods are complements

Question 16

What is income elasticity. The formula and measurements?

Answer 16

Measure the quantity demanded for a good with changes in consumer income.

% change in quantity / % change in income

e is greater than 1 = good is a luxury
e is less than 1 but greater than 0 = good is a necessity
e is less than 0 = considered an inferior good

Question 17

What happens to income and quantity if a good is deemed to be a luxury?

Answer 17

elasticity of demand (e) will be greater than 1. With a rise in % of income, than the quantity demanded will increase.
But if % of income falls, quantity demand will also fall.

Question 18

What happens to income and quantity if a good is deemed to be inferior?

Answer 18

elasticity of demand (e) will be less than 0. With a rise in % of income, than the quantity demanded will fall.
But if % of income falls, quantity demand will also rise.

Question 19

What happens to income and quantity if a good is deemed to be a necessity?

Answer 19

elasticity of demand (e) will be greater than 0, but less than 1. Quantity demanded will remain relatively the same % as the income rise or fall.

Question 20

What will happen to price and quantity, for cross-price elasticity, for a complement good?

Answer 20

If price of good 1 rises, we would expect the quantity demanded of good 1 to fall; if the quantity of good 2 falls as well then the two goods “go together”.

Question 21

What will happen to price and quantity, for cross-price elasticity, for a substitute good?

Answer 21

If price of good 1 rises, we would expect the quantity demanded of good 1 to fall; if the quantity of good 2 rises at the same time then people have moved towards 2 in the face of the higher price of good 1.