Elasticity (LS12)

Question 1

Price elasticity of demand

Answer 1

Measures the responsiveness of demand given a change in price

Question 2

Demand is said to be price elastic when…

Answer 2

A change in price causes a proportionately larger change in demand

Question 3

Demand is Price inelastic when…

Answer 3

a change in price causes a proportionally smaller change in demand

Question 4

Determinants of price elasticity of demand

Answer 4

1) number of substitutes (more substitutes, more elastic as ppl can just change brand)
2) necessity/luxury (if necessary then inelastic as they need it no matter the price, if luxury then elastic as they js won’t buy it)
3) addictiveness (addictive then inelastic as ppl will buy anyway)
4) Time (more time for people to deliberate buying, so elastic)
5) Proportion of income spent on g/s (higher proportion = more elastic as people can’t afford any price increases)

Question 5

Price elasticity of demand formula

Answer 5

% change in quantity demanded/ % change in price

Question 6

Price elasticity values

Answer 6

Elastic - greater than 1
Inelastic- between 0.01 and 0.99 recurring)
Unitary (elastic) - 1

Question 7

Price elasticity of supply

Answer 7

Measure the responsiveness of supply given a change in price

Question 8

Supply is said to be price elastic when

Answer 8

A change in price causes a proportionately larger change in supply

Question 9

Supply is said to be price inelastic..

Answer 9

If a change in price causes a proportionately smaller change in supply

Question 10

Determinants of price elasticity of supply

Answer 10

1)Time required to produce g/s- more time= more inelastic as firms can’t react quickly and change supply
2) level of spare capacity- greater spare capacity = more elastic as more FOP so can adapt quickly
3) number of stocks/finished goods available- more finished goods = more elastic as firms can respond quickly and release stocks if necessary
4) time- more time= more elastic as firms can expand or reduce production
5) perishability of the product (going off)- more perishable = more inelastic as harder to build up stocks
6) obsolete- when stocks become old due to technological advancements