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Elasticity of demand
Elasticity of demand subject at Irish school
| Question | Answer |
|---|---|
| Elasticity | responsiveness of demand to changes in other factors |
| PED | Price Elasticity of Demand |
| Formula for Price Elasticity of Demand | (dQ/dP) * (P1+P2)/(Q1+Q2) |
| Description for Price Elasticity of Demand | percentage change in quantity demanded of a good caused by percentage change in its price |
| Normal goods have a ________ PED | negative |
| Goods that do not obey the law of demand have a ________ PED | positive |
| PED = infinity in absolute terms | Perfectly Elastic demand |
| PED > 1 in absolute terms | Elastic demand |
| PED = 1 in absolute terms | Unit elasticity |
| PED < 1 in absolute terms | Inelastic demand |
| PED = 0 | Perfectly Inelastic demand |
| PED = -1.7 | Elastic demand |
| PED = -0.5 | Inelastic demand |
| For Elastic demand the proportionate change in Qty is _______ than in Price | greater |
| For _________________ demand the proportionate change in Qty is greater than in Price | Elastic |
| For Inelastic demand the proportionate change in Qty is _______ than in Price | less |
| For _________________ demand the proportionate change in Qty is less than in Price | Inelastic |
| For Unit Elasticity the proportionate change in Qty is _______ than in Price | equal |
| For _________________ demand the proportionate change in Qty is equal than in Price | Unit Elasticity |
| For Perfectly Elastic demand when the price increase the Qty ______________ | falls to zero |
| For _________________ demand when the price increase the Qty falls to zero | Perfectly Elastic |
| For Perfectly Inelastic demand when the price increase the Qty ______________ | doesn't change |
| For _________________ demand when the price increase the Qty doesn't change | Perfectly Inelastic |
| Total revenue | Price x Quantity |
| TR | Total revenue (price x quantity) |
| For Elastic demand when the Price changes the TR _________________ | changes in the OPPOSITE direction |
| For Inelastic demand when the Price changes the TR _________________ | changes in the SAME direction |
| For Unit Elasticity when the Price changes the TR _________________ | doesn't change |
| For ______________ when the Price changes the TR changes in the OPPOSITE direction | Elastic demand |
| For ______________ when the Price changes the TR changes in the SAME direction | Inelastic demand |
| For ______________ when the Price changes the TR doesn't change | Unit Elasticity |
| Factors affecting PED | Substitutes, Durability, Expensiveness, Complementary, Brand, Necessities |
| Factors affecting PED: ___________, Durability, Expensiveness, Complementary, Brand, Necessities | Substitutes |
| Factors affecting PED: Substitutes, __________, Expensiveness, Complementary, Brand, Necessities | Durability |
| Factors affecting PED: Substitutes, Durability, _____________, Complementary, Brand, Necessities | Expensiveness |
| Factors affecting PED: Substitutes, Durability, Expensiveness, _____________, Brand, Necessities | Complementary |
| Factors affecting PED: Substitutes, Durability, Expensiveness, Complementary, _____, Necessities | Brand |
| Factors affecting PED: Substitutes, Durability, Expensiveness, Complementary, Brand, ___________ | Necessities |
| Goods with many close substitutes have __________ demand | Elastic. When price increases, sales decrease in a greater proportion because consumers choose equivalent cheaper products. |
| Goods that are durable have _________ demand | Elastic. When price increases, sales decrease in a greater proportion because consumers can postpone the replacement in the hope that the price will fall again. |
| Goods that are expensive have ___________ demand | Elastic. When price increases, sales decrease in a greater proportion because a further increase may put them outside consumers reach |
| When goods have complementary goods, the cheaper of both is likely to have __________ demand | Inelastic. When price of the cheaper product increases, sales decrease in a small proportion, because it has small impact in the overall cost |
| Goods with good brand loyalty have ___________ demand | Inelastic. When price of the brand product increases, sales decrease in a small proportion, because consumers are attached to the product |
| Necessities or goods that are essential to life have ___________ demand | Inelastic. When price of the essential product increases, sales will not be affected because consumers can't live without it. |
| Luxuries have ___________ demand | Elastic. When price increases, sales decrease in a greater proportion because they are not essential |
| YED | Income Elasticity of Demand |
| Description of Income Elasticity of Demand | Percentage change in quantity demanded of a good caused by percentage change in income |
| Formula of Income Elasticity of Demand | (dQ/dY)*(Y1+Y2)/(Q1+Q2) |
| Normal goods have ______________ YED | Positive, because Qty increases as income rises |
| Inferior goods have ______________ YED | Negative, because less demand when income rises |
| Luxury goods and consumer durable have _____________ YED | High Positive, because demands increase significantly when income rises |
| Goods that have no increase in demand when income rises have ___________ YED | Zero |
| Goods when change in income equals change in demand have ____________ YED | Unitary |
| CED | Cross Elasticity of Demand |
| Description of Cross Elasticity of Demand | Percentage change in quantity demand of one good caused by percentage change in price of another good |
| Formula of Cross Elasticity of Demand | (dQX/dPY)*(PY1+PY2)/(QX1+QX2) |
| Increase in price of one good will lead to increase in demand for its substitute, therefore CED is ________ | Positive |
| PES | Price Elasticity of Supply |
| Description of Price Elasticity of Supply | Percentage change in quantity supplied caused by percentage change in price |
| Formula of Price Elasticity of Supply | (dQ/dP)*(P1+P2)/(Q1+Q2) |
| PES is usually _________ because price and quantity change in the same direction | positive |
| When a fixed quantity id supplied regardles of price, PES is ______ | Zero |
| When no product will be supplied below a certain price, PES is ________ | Infinite |
| Factor affecting PES: | Capacity, Mobility, Time, Nature of product, Production cost |
| Factor affecting PES: ________, Mobility, Time, Nature of product, Production cost | Capacity |
| Factor affecting PES: Capacity, ________, Time, Nature of product, Production cost | Mobility |
| Factor affecting PES: Capacity, Mobility, ____, Nature of product, Production cost | Time |
| Factor affecting PES: Capacity, Mobility, Time, _________________, Production cost | Nature of product |
| Factor affecting PES: Capacity, Mobility, Time, Nature of product, _______________ | Production cost |
| PES factors: if the producer is at full CAPACITY it can't respond to price increases so supply will be __________ | Inelastic |
| PES factors: the easier MOBILITY from production of one good to another, the more _________ the supply will be | Elastic |
| PES factors: The longer the TIME period, the more ___________ the supply will be | Elastic |
| PES factors: If the NATURE OF PRODUCT is perishable the supply is likely to be _________ | Inelastic. |
| PES factors: If the NATURE OF PRODUCT is long duration the supply is likely to be _________ | Highly elastic. |
| PES factors: If PRODUCTION COST doesn't change when production is increased the supply will be _________ | Elastic |
| Increasing production: producer will have to _______ prices in order to sell the extra output | lower |
| Indirect taxes: increasing taxes increase price and affects _________ | demand |
| Increasing indirect taxes will only increase total tax revenue if price is _________ | Inelastic |
| Why government regularly increases taxes for tobacco, alcohol and petrol | Because they have inelastic demand and price increase doesn't seem to affect demand |
| Why is negative to increase taxes for products with elastic demand | Because the price increase causes a reduction on demand, and the total tax revenue is reduced |
| Increase in price of one good will lead to decrease in demand for its complement, therefore CED is ________ | Negative |
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