Elasticities

Question 1

Define PED

Answer 1

Responsiveness of quantity demanded in response to a given change in price.

Question 2

Factors which affect PED

Answer 2

(SPLAT)
S - number/ price of substitutes as consumers can just switch if price ups.
P - percentage of total income - if it’s a small proportion of total income, likely to be more inelastic.
L - luxury or necessity good? Necessities tend to be more inelastic
A - addictiveness - goods which are addictive like cigarettes may be more inelastic.
T - time period to make a decision, short run elastic

Question 3

DEFINE PES

Answer 3

Responsiveness of quantity supplied given a change in price

Question 4

Factors which affect PES

Answer 4

(PSSST):

P - production lag - longer production lag = more inelastic, because hard to respond to the price stimulus.
S - stocks - easy to increase supply if larger stocks = more elastic
S - spare capacity - high spare capacity = easy to increase supply = elastic
S - substitutability of FoP - more substitutable factors = more elastic, as they can switch from producing one good to focusing on another of their goods
T - time - how much time to increase the supply of the good

Question 5

Define XED

Answer 5

Responsiveness of quantity demanded of a good given a change in the price of another

Question 6

The sign of the xed

Answer 6

• = COMPLEMENTARY GOOD
  + = SUBSTITUTE GOOD

Question 7

Factors which affect XED

Answer 7

Anything which affects how strongly related the two goods are

Question 8

Define YED

Answer 8

The responsiveness of quantity demanded given a change in income

Question 9

Sign changes in YED

Answer 9

+ = normal good
- = inferior good

Question 10

If YED ><1

Answer 10

> 1 is normal luxury, <1 normal necessity
1 demand is income elastic, <1 demand is income inelastic

Question 11

Factors which affect YED

Answer 11

The type of good.