Theory question 107
Elasticity(a) Define (i) elasticity of demand; (ii) price elasticity of demand.
(b) State any four determinants of price elasticity of demand.
(c) Draw curves illustrating (i) fairly elastic demand; (ii) perfectly inelastic demand.
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(a)(i) Elasticity of demand is the degree of responsiveness of quantity demanded to a change in any of its determinants (price, income, prices of other goods).
(ii) Price elasticity of demand is the responsiveness of quantity demanded to a change in the good's own price: % change in quantity demanded ÷ % change in price.
(b) Any four: availability of substitutes; nature of the good (necessity or luxury); proportion of income spent on it; number of uses; habit; durability; time period; whether purchase can be postponed.
(c)(i) A relatively flat downward-sloping demand curve (a small price change gives a larger change in quantity).
(ii) A vertical demand curve (quantity does not change whatever the price).
Label axes on both sketches.