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Elasticity
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- 1What is elasticity?Elasticity is the responsiveness of one variable to another variable
- 2What is Elasticity of Demand?Elasticity of Demand is the measure of the responsiveness of the quantity demanded for a good or service to changes in the factors or variables that affect this demand
- 3What are the three main variables that affect the quantity demanded of a good/service?The price of the good itself, the income of consumers and the prices of substitute and complimentary goods
- 4What are the three types of elasticity of demand?Price Elasticity of demand (PED), Income Elasticityof demand (YED) and Gross Elasticity of Demand (XED)
- 5What is PED?PED is the measure of responsiveness of the quantity demanded of a good to changes in its price
- 6What is the formula for PED?
- 7What is the importance of PED to Businesses?PED helps business owners understand how changes in the price/s of their goods and services would affect their total revenue and ultimately affect their profits
- 8What are the five types/degrees of PED?Main:
Elastic Demdand, Inelastic Demand, Unitary/Unit Demand,
Other:
Perfectly Elastic Demand and Perfectly Inelastic Demand - 9What is Elastic Demand?Demand is considered elastic when a percentage change in price results in a greater percentage change in the quantity demanded of a good/service
- 10What is the formula for Elastic PED? (Elastic PED is usually represented by a shallow line D-curve)PED=
% △ in QD
-------------------------- >1
% △ in P - 11What is Inelastic Demand?Demand is considered inelastic when a percentage change in price leads to a smaller percentage change in quantity demanded
- 12What is the formula for Inelastic Demand? (Inelastic Demand is represented by a steep line Demand curve)PED=%△ in Qd
------------------------ < 1
%△ in Price - 13What is Unitary Elastic Demand?Demand for a good is said to be unitary Elastic when any change in price results in an equal or similar percentage change in quantity demanded
- 14What is the formula for unitary elastic PED? (Unitary elastic demand is represented by a demand curve described as a rectangular hyperbola)PED= %△ in Qd
------------------------- = 1
%△ in Price - 15What is Perfectly elastic Demand? (Perfectly Elastic PED is represented by a horizontal line)Perfectly elastic demand is when a change in price could result in a change in quantity demand ranging from 0 to infinity
- 16What is Perfectly Inelastic Demand? (Perfectly Inelastic PED is represented by a vertical line)Perfectly inelastic demand is when any change in price leads to no responsive change in quantity demanded, that is any change leaves the demand unchanged
eg. cigarettes - 17What are the six factors affecting PED?Number of substitutes available, Addictive/ Habit-forming Goods, Necessities (goods we must have or cannot survive without), Luxuries, Proportion of income spent on goods (whether or not goods are cheap) Time period in the short run (demand tends to be inelastic as consumers may not be aware of alternative products) and the long run (demand tends to be elastic because consumers have time to learn about cheaper alternatives)
- 18How does Elastic PED affect total revenue?When demand for a good is elastic, a fall in price would increase the total revenue and rise in price would decrease the total revenue
- 19How does Inelastic PED affect total revenue?When demand for a good is inelastic, an increase in price would increase the total revenue and a decrease in price would decrease the total revenue
- 20How does Unitary/Unit PED affect total revenue?When demand for a good is Unitary Elastic, any change in price leaves total revenue unchanged
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