ELASTICITY REVISION
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01
TRUE OR FALSE Price elasticity of demand measures the responsiveness of price to a change in the quantity demanded.
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01
FALSE
It measures the responsiveness of QD to a change in the price of the good
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02
TRUE/FALSE Elasticity can be used to predict how much tax revenue a government can earn from an indirect tax.
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TRUE. If the good is inelastic, the government will earn a large amount of tax revenue.
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03
Yesterday, the price of a pack of envelopes was £3.00. At that price JuLie was willing to buy 10 packs. Today, the price has gone up to £3.75, and Julie is now willing to only purchase 8 packs of envelopes. Calculate the P.E.D.
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03
% change in Qd8-10/10 x 100 = -20%
% change in Price £3.75-£3.00/£3.00 = 25%
P.E.D = -20/25 = -0.8
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04
A market vendor decides to increase the price of a container of sweet peppers from £1.00 to £1.50. At the price of £1.00 he used to sell 30 containers per day. After the price increase he makes no sale. Calculate the P.E.D. Categorise the elasticity coefficient.
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05
% change in Qd0-30/30 X 100 = -100%
% change in Price £1.50-£1.00/£1.00 X 100 = 50%
P.E.D = 20/25 = -2 Elastic
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06
TRUE OR FALSE. A product with a P.E.D. of -1.5 is described as inelastic.
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FALSE Ignore the negative sign. It is greater than 1 and is therefore elastic.
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06
WHAT IS THE ACRONYM USED TO REMEMBER THE DETERMINANTS OF P.E.S.?
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PSSST Production lag, Spare capacity, Substitutability of factors of production, Storage, Time + Government policies too!
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06
TRUE OR FALSE. If the P.E.D. of a good is unit elastic, an increase in the price of the good will not change the total revenue earned.
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TRUE. When the P.E.D is unit elastic a change in the price,up or down, will have no affect on TR because the percentage change in Qd will be equal to the percentage change in price.
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02
TRUE OR FALSE The P.E.S will tend to be more inelastic in the long-run.
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FALSE The P.E.S will tend to be more elastic in the long-run as producers/firms have time to adjust their production process.
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01
TRUE OR FALSE Demand tends to be more elastic at higher prices and inelastic at lower prices.
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REVIEW SHEET
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TRUE This is demonstrated by the linear demand curve.
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01
Which is likely to have a more elastic coefficient, toilet paper or Sainsbury's own brand toilet paper?
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Sainsbury's own brand toilet paper because there are close substitutes.
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01
A business supplies both manufactured artifical flowers and fresh cut flowers. The price of both products increases. Which product is likely to have a more elastic P.E.S. and why?
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Manufactured artificial flowers will be more elastic. Reasons are as follows: There is likely to be spare capacity/extra stock in the factory however, there will be a time lag for fresh flowers as they are most likely seasonal. they also take time to grow.
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01
An increase in income leads to an increase in the demand for a particular good. This good may be classified as a/an...
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Normal good. The change in income and demand move in the same direction (positive or direct)
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01
During a recession a family purchases frozen vegetables. As income increases the family switches from purchasing frozen vegetables to fresh vegetables. Frozen vegetables is therefore a/an...
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Inferior good. As income increases less is purchased.
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REINFORCEMENT SHEET
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The YED for a good is -0.4. What does this information infer?
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The sign is negative and therefore it is an inferior good. A 4% increase in income leads to a 10% decline in the purchase of the good. It is an inelastic response.
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01
The C.E.D for two goods is -2.5. What does this information imply?
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The goods are complementary. For example, if the price of coffee goes up by 10% the demand for coffee filters falls by 4 %. It's great when you use numbers in the explanation!
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01
The goods are complementary. For example, if the price of coffee goes up the demand for coffee filters.
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01
A bus company increases its bus fares by 5%. The bus company has a P.E.D. of -2.2. Calculate the impact of this price increase on the quantity of journey's demanded?
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REVIEW SHEET
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Step 1P.E.D. = % change in Qd_____________% change in price
-2.2 X 5% = % change in Qd% change in Qd = 11%
step 2-2.2 = % change in Qd ________5%
The demand for bus journey's will fall by 11%
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01
The price elasticity of demand (PED) for a certain over-the-counter medicine is –0.4. Following a government subsidy, the quantity demanded increases by 12%. Calculate the percentage change in price. Show your working. 4 marks
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REVIEW SHEET
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% change in P =12/0.4 = 30%
P.E.D. = % change in Qd_____________% change in price
-0.4 (PED) = 12% (%ch Qd) ___ X (solve for% ch. P)
The price of the medicine decreases by 11%
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END OF REVISION
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