Topic 3

Question 1

Impacts on Elasticity

Answer 1

• Availability of substitutes (key determinant)
• Time horizon (time to adapt to price changes)
• Narrowness of product category (specific or broad, Nurafen vs ibuprofen)
• Necessities vs Luxuries
• Purchase Impact (impact on budget)

Question 2

Elasticity of Demand: Purpose

Answer 2

Measure responsiveness to:

• Good’s own price
• Other goods prices
• People’s income

Question 3

Elasticity of Demand: Formula

Answer 3

Elasticity = (% change in Quantity Demanded) / (% change in Price)

Question 4

Inelastic Demand Curve

Answer 4

• < 1 (or less than -1)
• Steeper Demand Curve

Question 5

Elastic Demand Curve

Answer 5

• > 1 (or greater than -1)
• Flatter demand curve

Question 6

Unit Elastic Demand Curve

Answer 6

• = 1
• 45 degree gradient

Question 7

Elasticity Midpoint Forumula

Answer 7

* Used to eliminate relative directional impact

Question 8

Revenue Impact from from Price move when Elasticity is < 1

Answer 8

Price and Revenue Move Together

Question 9

Revenue Impact from from Price move when Elasticity is > 1

Answer 9

Price and Revenue Move in Opposition

Question 10

Revenue Impact from from Price move when Elasticity is = 1

Answer 10

Price moves but Revenue stays the same

Question 11

Point Elasticity vs Arc Elasticity

Answer 11

• Point: % change at a single point
  
  • ie (Q1-Q2/Q2 …)
• Arc: uses midpoint formula
  
  • ie (Q1-Q2/Avg(Q1+Q2) …)

Question 12

Elasticity Along a Straight Line Demand Curve

Answer 12

* Increases to the left * Decreases to the right

Question 13

Cross-price elasticity

Answer 13

% change in quantity demanded of A / % change in price of B

Question 14

Income Elasticity of Demand

Answer 14

% change in quantity demanded / % change in income

Question 15

Types of good

Answer 15

• Normal
• Inferior
• Luxury

Question 16

Normal Good

Answer 16

• Positive income elasticity of demand
  
  • Increase in income -> increase in quantity demanded

Question 17

Inferior Good

Answer 17

• Negative income elasticity of demand
  
  • Increase in income -> decrease in quantity demanded

Question 18

Luxury Good

Answer 18

• Positive income elasticity of demand, > 1
  
  • Increase in income -> increase in quantity demanded

Question 19

Network Effects

Answer 19

For some goods or services the benefit is proportional to the number of other customers
* eg. two-sided market platform
* User content based platform (eg instagram)
* Review based platform (eg. trip advisor)

Question 20

Infinitely / Perfectly Elastic Curve

Answer 20

Horizontal Line

Question 21

Perfectly Inelastic Curve

Answer 21

Looks like an 'I', for Inelastic

Question 22

Continuously Elastic Curve

Answer 22

Question 23

Cross Elasticity of Demand - Goods Relationships

Answer 23

• Substitutes - CED is Positive
• Complements - CED is Negative
• Unrelated - CED = 0

Question 24

Profit Maximising Pricing Formula

Answer 24

( Price - Marginal Cost) / Price = 1/Elasticity.