9 Elasticity

Question 1

Elasticity

Answer 1

responsiveness in change in one thing to a change in something else

Question 2

Price elasticity of demand

Answer 2

• measures the responsiveness of demand after a change in price
• %∆ in quantity demanded / %∆ in price
• always negative

Question 3

Interpreting PED

Answer 3

• Perfectly inelastic =0 quantity demanded totally unresponsive to a change in price
• inelastic = 0 to -1 quantity demanded relatively unresponsive to a change in price
• unit elastic = -1 quantity demanded has the same response as a change in price
• elastic = -1 to -∞ quantity demanded is relatively responsive to change in price
• perfectly elastic = -∞ quantity demanded changes infinitely. can only be one price

Question 4

Factors that determine the value of PED

Answer 4

• The availability of substitute products - likely to be more elastic as consumer can purchase similar product ie different brands
• necessity of product - i.e few or no substitutes more likely to be inelastic consumers will continue to purchase it in same quantity
• proportion of income - if large proportion likely to be more elastic because consumers won’t be able to afford a price increase
• Addiction - want to continue purchasing even if price increases more inelastic
• time period - in long term period a switch their consumption to lower price alternative

Question 5

Income elasticity of demand

Answer 5

• measures the responsiveness of demand after a change in income
• %∆ in quantity demanded / %∆ in income

Question 6

Interpreting YED

Answer 6

• Luxury = 1 to ∞ relatively small. increase in income can lead to large increase in demand ex holidays or jewellry
• normal good = 0 to 1 buy more ther more money we have ex clothes
• no relationship = 0 need the same quantity no matter what income is ex medicine
• inelastic = 0 to -∞ buy more as income falls as it is more affordable ex frozen pizza and fast food

Question 7

cross elasticity of demand

Answer 7

• the responsiveness of demand fro one product to a change in price for another product
  -%∆ in quantity demanded fro product A / %∆ in price for product B

Question 8

Interpreting XED

Answer 8

• Close substitutes = 1 to ∞ relatively small increase in price means that consumers switch to substitute product by larger amount
• weak substitutes = 0 to 1 increase in price means that consumers switch to substitute product by relatively small amount
• no relationship = 0 no change between goods when price of one increases
• weak complements = -1 to 0 increase in price means that consumers purchase less of complementary products by relatively small amount
• Close complements = -∞ to -1 relatively small increase in price means that consumers purchase less of complementary products by larger amount

Question 9

Price elasticity of supply

Answer 9

• measures the responsiveness of supply after a change in price
• %∆ in quantity supplied / %∆ in price
• always positive

Question 10

Interpreting PES

Answer 10

• Perfectly inelastic = 0 quantity supplied is totally unresponsive to a change in price
• inelastic = 0 to -1 quantity supplied relatively unresponsive to a change in price
• unit elastic = -1 quantity supplied has the same response as a change in price
• elastic = -1 to -∞ quantity supplied is relatively responsive to change in price
• perfectly elastic = -∞ quantity supplied changes infinitely. can only be one price

Question 11

Factors that affect PES

Answer 11

• time - The shorter the time period the harder it is for firms to increase their production in response to higher prices. long term = more price
  elastic
• Availability of Producer Substitutes (ease of mobility of factor substitutes)- good has a lot of producer substitutes, supply will be more elastic. resources can be moved from making one product to making the one that has risen in price.
• The ability to store stock - good can easily be stored (it’s not perishable) then the producer can use their stored stock to release the good on to the market. This makes the good more price elastic in supply.
• The level of capacity in the industry - spare/unused capacity supply will be more price elastic as output can be increased reasonably quickly.
• Rate at which costs increase - If the costs of increasing output increase rapidly then supply will be price inelastic as firms will not want to incur large costs.