Price Elasticity of Demand Quiz

Study Notes

Elasticity measures the responsiveness of demand or supply to a change in price.
Price elasticity of demand (PED) measures how responsive demand is to a change in price.
Formula: PED = %ΔQD / %ΔP
- %ΔQD = Percentage change in quantity demanded
- %ΔP = Percentage change in price

Elastic: PED > 1, demand is very responsive to price changes. A change in price leads to a larger percentage change in quantity demanded.
Inelastic: PED < 1, demand is not very responsive to price changes. A change in price leads to a smaller percentage change in quantity demanded.
Unitary elastic: PED = 1, the percentage change in quantity demanded is equal to the percentage change in price.
Perfectly elastic: PED = ∞, any price change leads to an infinite change in quantity demanded (horizontal demand curve).
Perfectly inelastic: PED = 0, quantity demanded does not change with any price change (vertical demand curve).

Necessity: Goods with few substitutes (e.g., essential medicines) tend to be inelastic.
Availability of substitutes: Goods with many substitutes (e.g., different brands of soft drinks) tend to be elastic.
Proportion of income spent on the good: Goods that take up a large portion of a consumer's income tend to be more elastic.
Durability of the good: Durable goods are usually more elastic, as consumers can postpone purchases.
Time period: Demand tends to be more elastic in the long run than in the short run, as consumers have more time to adjust their behaviour.
Addictiveness or habitual consumption: Goods like cigarettes, highly addictive or habitual, tend to be inelastic.

The incidence of a tax (who bears the burden) depends on the elasticity of demand.
With inelastic demand, consumers bear a larger portion of the tax burden.
With elastic demand, suppliers bear a larger portion of the tax burden.

Measures how responsive supply is to a change in price.
Formula: PES = %ΔQS / %ΔP
- %ΔQS = Percentage change in quantity supplied
- %ΔP = Percentage change in price

Elastic: PES > 1, supply is highly responsive to price changes.
Inelastic: PES < 1, supply is not very responsive to price changes.
Unitary elastic: PES = 1, percentage change in quantity supplied equals percentage change in price.
Perfectly elastic: PES = ∞, an infinitely small increase in price leads to an infinite increase in quantity supplied (horizontal supply curve).
Perfectly inelastic: PES = 0, quantity supplied does not change with any price change (vertical supply curve).

Time Period: Supply tends to be more elastic in the long run than in the short run.
Spare Capacity: Ability to increase production quickly.
Level of Stocks: Ability to draw on existing inventory.
Resource mobility: Ability to reallocate resources to different uses.
Barriers to Entry: Difficulty for new suppliers to enter the market.

Measures the responsiveness of the quantity demanded of one good to a change in the price of another good.
Formula: XED = %ΔQD of good X / %ΔP of good Y
Complements: XED is negative, indicating that a price increase in one good leads to a decrease in the quantity demanded of the other good.
Substitutes: XED is positive, indicating that a price increase in one good leads to an increase in the quantity demanded of the other good.
Unrelated goods: XED is zero, indicating no relationship between the goods.

Measures the responsiveness of the quantity demanded of a good to a change in consumer income.
Formula: YED = %ΔQD / %ΔY
- YED = Income Elasticity of Demand
- %ΔQD = Percentage change in quantity demanded
- %ΔY = Percentage change in income.
Normal Goods: YED > 0, demand increases with income.
Inferior Goods: YED < 0, demand decreases with income.
Luxury Goods: YED > 1, demand increases more than proportionally with income.