Elasticity

• What is elasticity of demand a measure of?

  How much the demand for a good changes with a change in price, income, or the price of another good.
• What does Price Elasticity of Demand (PED) measure?

  How the quantity demanded of a good responds to a change in its price.
• How can you calculate PED?


  PED = percentage change in quantity demanded / percentage change in price.
• Why is price elasticity of demand usually negative?

  Because demand typically falls as price increases for most goods.
• What indicates elastic demand in terms of PED?

  PED > 1
• What does it mean if demand is elastic?

  A percentage change in price causes a larger percentage change in quantity demanded.
• What is perfectly elastic demand?


  Demand with a PED of ∞, where any increase in price results in demand falling to zero.
• What indicates inelastic demand in terms of PED?

  0 < PED < 1
• What does it mean if demand is inelastic?

  A percentage change in price causes a smaller percentage change in quantity demanded.
• What is perfectly inelastic demand?


  Demand with a PED of 0, where a change in price has no effect on quantity demanded.
• What indicates unit elasticity of demand in terms of PED?


  PED = 1
• What does unit elasticity of demand mean?


  The size of the percentage change in price is equal to the size of the percentage change in quantity demanded.
• If real incomes increase by 10% and demand for cameras increases by 15%, what is the income elasticity of demand (YED) for cameras?


  1. 5
• What does income elasticity of demand (YED) measure?


  How much the demand for a good changes with a change in real income.
• What indicates income elastic demand in terms of YED?


  YED > 1
• What does it mean if demand is income inelastic?


  A percentage change in income causes a smaller percentage change in quantity demanded.
• What indicates perfectly inelastic demand in terms of YED?


  YED = 0
• What does cross elasticity of demand (XED) measure?


  How the quantity demanded of one good responds to a change in the price of another good.
• If two goods are substitutes, what will their XED be?


  Positive
• If the price of toy cars rises by 40% and the demand for teddy bears increases by 20%, what is the XED?

  0.5
• If the price of tennis rackets rises by 50% and the demand for tennis balls falls by 30%, what is the XED?


  • 0.6
• What is the formula for XED?

  XED = percentage change in quantity demanded of good A / percentage change in price of good B.
• What are the implications of PED for a firm's revenue?

  PED affects how changes in price influence total revenue.
• What happens to total revenue when a good has elastic demand?

  A reduction in price will increase the firm's total revenue.
• What happens to total revenue when a good has inelastic demand?

  A reduction in price will reduce the firm's total revenue.
• What is the relationship between total revenue and price elasticity of demand along a straight line demand curve?


  Elasticity changes along the demand curve, affecting total revenue.
• What is the formula for Price Elasticity of Supply (PES)?


  PES = percentage change in quantity supplied / percentage change in price.
• What does PES measure?


  How the quantity supplied of a good responds to a change in its price.
• If the price of a smartphone increases from £449 to £485 and the supply increases from 15000 to 21500, what is the percentage change in quantity supplied?


  43.33%
• What is the percentage change in price when the price of a smartphone increases from £449 to £485?


  8%
• What is the calculated PES for the smartphone example?


  1. 42
• Why is PES generally positive?


  Because the higher the price, the greater the supply.
• What indicates elastic supply in terms of PES?


  PES > 1
• What does it mean if supply is elastic?


  A larger percentage change in price will cause a larger percentage change in quantity supplied.
• If the price increases from £5 to £7 and an extra 7 units are supplied, what is the PES?


  1. 75
• What is perfectly elastic supply?

  Supply with a PES of infinity, where any fall in price results in supply falling to zero.
• What indicates inelastic supply in terms of PES?

  0 < PES < 1
• What does it mean if supply is inelastic?

  A percentage change in price will cause a smaller percentage change in quantity supplied.
• What is the formula for calculating PES?

  PES = percentage change in quantity supplied / percentage change in price.
• How does the concept of PES differ from PED?


  PES measures supply response to price changes, while PED measures demand response to price changes.