Elasticities

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What are the possible ranges of values for PED?

Perfectly elastic (∞), elastic (>1), unitary (=1), inelastic (

What does elasticity measure in economics?

The responsiveness of one variable to a change in another variable, such as quantity demanded to a change in price.

Define income elasticity of demand (YED).

YED measures the responsiveness of demand to a change in consumer income.

Explain how elasticity affects the volatility of primary commodity prices.

Low PED and PES cause large price fluctuations when demand or supply changes.

What does a positive YED indicate?

The good is a normal good — demand rises when income increases.

If the price of a product rises by 10% and quantity supplied rises by 15%, what is PES?

PES = 15 ÷ 10 = 1.5 (elastic).

State the formula for price elasticity of supply (PES).

PES = percentage change in quantity supplied ÷ percentage change in price.

A 20% rise in price causes a 10% fall in demand. What happens to total revenue?

Demand is inelastic (PED = 0.5), so total revenue increases.

How can governments use elasticity concepts for taxation policy?

They can impose higher taxes on inelastic goods to raise more revenue with smaller quantity changes.

What does a negative YED indicate?

The good is an inferior good — demand falls when income increases.

If the price of a product rises by 10% and quantity demanded falls by 20%, what is PED?

PED = 20 ÷ 10 = 2 (elastic).

If the price of a product falls by 5% and quantity demanded increases by 2%, what is PED?

PED = 2 ÷ 5 = 0.4 (inelastic).

List three main determinants of PED.

Number and closeness of substitutes, proportion of income spent, and time period.

State the formula for price elasticity of demand (PED).

PED = percentage change in quantity demanded ÷ percentage change in price.

Why is the PED for primary goods generally lower than for manufactured goods?

They are necessities with fewer substitutes, so consumers are less responsive to price changes.

What is the relationship between PED and total revenue?

If demand is elastic, price and total revenue move in opposite directions; if inelastic, they move in the same direction.

How can knowledge of YED help firms plan production?

Firms producing luxury goods can expect higher sales during economic growth and lower sales during recessions.

State the formula for income elasticity of demand (YED).

YED = percentage change in quantity demanded ÷ percentage change in income.

Define price elasticity of supply (PES).

PES measures the responsiveness of quantity supplied to a change in price.

How can firms use knowledge of PED in pricing decisions?

If demand is inelastic, firms can raise prices to increase total revenue.

Why is the PES for primary commodities generally lower than for manufactured goods?

Because production of primary goods is limited by natural factors and time, making supply less responsive to price changes.

List three main determinants of PES.

Mobility of factors of production, unused capacity, and ability to store stock.

Why is time an important factor affecting elasticity?

Over time, consumers and producers can adjust behavior, making both demand and supply more elastic.

If income increases by 8% and demand for a product rises by 4%, what is YED?

YED = 4 ÷ 8 = 0.5 (income inelastic normal good).

Define price elasticity of demand (PED).

PED measures the responsiveness of quantity demanded to a change in price.

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