Year 1 Microeconomics - Elasticity

Question 1

what is ped

Answer 1

measures the responsiveness of quantity demanded given a change in price

Question 2

ped equation

Answer 2

1. difference/ original x 100
2. percentage change in quantity demanded / percentage change in price x 100

Question 3

what are the laws of PED

Answer 3

• less than 1, demand is price inelastic
• greater than 1, demand is price elastic
• zero , demand is perfectly price inelastic
• infinity - demand is perfectly price elastic
• one - demand is unit price elastic

Question 4

when are goods price inelastic/elastic

Answer 4

SPLAT
Substitutes - the more substitutes there are, the more price elastic demand will be, vice versa
Percentage of income - the greater the percentage of income that a price change takes, the more elastic demand is gonna be, vice versa
Luxury or necessity? luxury tends to have more price elasticity whilst necessities are more inelastic
Addictive? Habit forming? - demand may fall but not by a lot even if the price is increased, inelastic

Question 5

what is total revenue

Answer 5

price x quantity sold

Question 6

if a firm has a price elastic good, what would they do

Answer 6

• whatever they do with price, the opposite will happen with total revenue
• increased price, TR falls as an increased price means lower quantity demanded, vice versa

Question 7

if a firm has a price inelastic good, what would they do

Answer 7

• whatever they do with the price, the same will happen to total revenue
• eg increased price, increased TR, decreased price , decreased TR

Question 8

what is price elasticity of supply

Answer 8

measures the responsiveness of quantity supplied given a change in price

Question 9

PES equation

Answer 9

percentage change of quantity supplied / percentage change in price

Question 10

PES laws

Answer 10

• greater than 1 - supply is price elastic
• less than 1 - supply is price inelastic
• 0 - supply is perfectly price inelastic
• infinity - price is perfectly price elastic
• 1 - supply us unit price elastic

Question 11

factors that effect supply elasticity

Answer 11

Production lag - the longer the production lag, the more inelastic supply will be, as it would be hard to increase production
- storage - goods that can be stored easily without loss of quality are more PES elastic
- technological advances - technology can make production more efficient and flexible, increasing the PES
- spare capacity - firms with unused capacity can increase output if prices rise. if they are already operating at full capacity, it would be hard to increase output
- the ease of access to raw materials. if inputs are readily available and can be easily increased , PES more elastic
- flexibility of production - if a firm can easily switch between producing different goods, supply is more elastic

Question 12

what is XED

Answer 12

measures the responsiveness of quantity demanded of a good/service given a change in price of another

Question 13

XED equation

Answer 13

percentage change in quantity demanded of good A / percentage change in price of good B

Question 14

how can we tell from XED if two goods are substitutes or complements

Answer 14

negative XED - complements
positive XED - substitutes

Question 15

laws of XED

Answer 15

• greater than one - demand between the goods is price elastic
• less than one - demand between the goods is price inelastic
• 0 - demand between the goods is perfectly price inelastic

Question 16

What is income elasticity of demand?YED

Answer 16

It measures the responsiveness of quantity demanded given a change in income

Question 17

YED equation

Answer 17

Percentage change in quantity demanded / percentage change in income

Question 18

How to tell if a good is normal or inferior using YED

Answer 18

Positive is normal negative is inferior

Question 19

YED laws

Answer 19

• greater than 1 - income elastic - NORMAL LUXURY
• ## less than 1 - demand is income inelastic - normal necessity

INFERIOR
- greater than 1 , demand is income elastic
- less than one , demand is income inelastic
- 0 - demand is perfectly income inelastic

Question 20

why is PED important for firms

Answer 20

• important for businesses when making pricing decisions for total revenue
• employment, level of stock and output

Question 21

why is PES important for businesses

Answer 21

• allows firms to find ways to make supply price elastic

Question 22

why is XED for businesses

Answer 22

• important from pricing decisions - eg if a company is making complements, they can reduce the price of the first good, increase the price of the other
• non price competition - eg if a firm is making substitues, may consider cutting price/ but may cause price wars (look at non price competition
• employment, stocks , output

Question 23

why is YED good for businesses

Answer 23

pricing decisions - planning for recessions and goods
eg, a firm selling a normal good may increase prices in a boom and may expect an increase in demand so will increase employment

Question 24

limitations of elasticity

Answer 24

• elasticity figures are only estimates, data collected from surveys, competitors, or past data
• they assume ceteris paribus, there are other factors which affect demand and supply
• PED varies along the demand curve - for a business, they can’t keep changing their price by the same amount and expecting the same impact on quantity demanded