Price elasticity, income elasticity and cross elasticity of demand · AS Level Economics

Which statement defines the income elasticity of demand?

• AIt measures the responsiveness of income to a change in quantity demanded.
• BIt measures the responsiveness of income to a change in price.
• CIt measures the responsiveness of quantity demanded to a change in income.
• DIt measures the responsiveness of quantity demanded to a change in price.

Doctors are concerned about the negative health effects of sugary drinks.

When would a tax on sugary drinks be least effective in improving health?

• Awhen the demand for sugary drinks is income elastic
• Bwhen the demand for sugary drinks is income inelastic
• Cwhen the demand for sugary drinks is price elastic
• Dwhen the demand for sugary drinks is price inelastic

The market for good X is in equilibrium with 1000 units sold at a price of $10. The government puts a specific tax of $1 per unit on the producers of good X.

Which value for the price elasticity of demand for good X will generate the largest tax revenue?

• A0
• B0.5
• C1.0
• D1.5

The price of a pizza has increased from $8 to $10. This leads to a decrease in quantity demanded of 12.5%.

What is the price elasticity of demand of pizza?

• A0.5
• B0.8
• C1.6
• D2.0

The price elasticity of demand for a good is highly elastic.

What is the impact on expenditure on this good when its price increases?

• Adecreases
• Bincreases by a large amount
• Cincreases by a small amount
• Dstays unchanged

What is cross elasticity of demand?

• Athe responsiveness of price of good X to a change in demand of good Y
• Bthe responsiveness of quantity demanded of a good to a change in its price
• Cthe responsiveness of quantity demanded of good X to a change in quantity of good Y
• Dthe responsiveness of quantity demanded of good X to a change in the price of good Y

An economy is experiencing a fall in real GDP. Also, deflation has caused the prices of four goods, A, B, C and D to each fall by 5%.

Which good is likely to enjoy the largest increase in its sales revenue?

income elasticity price elasticity of demand of demand

• A+0.5 −1.5
• B+1.5 −1.0
• C−0.5 −1.0
• D−1.5 −1.5

Which statement is true if the income elasticity of demand for a good has a value of –0.2?

• AWhen income rises less of the good is bought.
• BWhen income rises more of the good is bought.
• CWhen price falls more of the good is bought.
• DWhen price rises less of the good is bought.

The table shows the price of a good and total expenditure on the good during specific periods when the market is in equilibrium.

price total expenditure period ($) ($)

1 12 96000

2 5 40000

3 8 64000

4 10 80000

5 4 32000

What can be deduced from this data?

• AThe good has constant opportunity cost.
• BThe good is an inferior good.
• CThe price elasticity of demand is equal to one.
• DThe price elasticity of supply is equal to zero.

Public transport in an economy has an income elasticity of demand of –0.36.

What does this mean about public transport?

• AIt is an inferior good.
• BIt is a necessity.
• CIt is a normal good.
• DIt has close substitutes.

Good X has an income elasticity of demand (YED) value of −0.8. Its cross elasticity of demand (XED) with respect to good Y is also −0.8.

What are the characteristics of good X?

• Aa normal good that is a complement to good Y
• Ba normal good that is a substitute for good Y
• Can inferior good that is a complement to good Y
• Dan inferior good that is a substitute for good Y

Assuming demand is price elastic, what will rise the most if an indirect tax is removed?

• Aconsumer expenditures
• Bprice of the product
• Cproducers’ revenues
• Dtax receipts

A government provides a subsidy for a product with a perfectly price inelastic demand.

What prevents producers from benefiting from this subsidy?

The subsidy causes a large reduction in the price of the product as its price elasticity of demand

• AThe subsidy causes a large reduction in the price of the product, as its price elasticity of demand is infinite. The subsidy causes a large reduction in the price of the product as its price elasticity of demand
• BThe subsidy causes a large reduction in the price of the product, as its price elasticity of demand is zero. The subsidy causes a small reduction in the price of the product as its price elasticity of demand
• CThe subsidy causes a small reduction in the price of the product, as its price elasticity of demand is relatively elastic. The subsidy causes a small reduction in the price of the product as its price elasticity of demand
• DThe subsidy causes a small reduction in the price of the product, as its price elasticity of demand is relatively inelastic.

The main export of country X is oil. The world demand for oil is price inelastic. The world supply of oil is reduced by the major oil producing countries, including country X. Imports into country X are unchanged.

What are the effects of this action by the major oil producing countries on the terms of trade and the current account of the balance of payments in country X?

terms of trade current account

• Aincreases increases
• Bincreases decreases
• Cdecreases increases
• Ddecreases decreases

A firm sells 10 000 units of a product which has an estimated income elasticity of demand of –0.4.

If incomes have fallen by 10%, what is the new quantity demanded?

• A9000
• B9600
• C10000
• D10400

A government imposes a specific indirect tax on a product that has an inelastic demand curve.

What is the incidence of tax in this case?

• AThe tax falls entirely on the consumer.
• BThe tax falls entirely on the producer.
• CThe tax falls to a greater extent on the consumer than on the producer.
• DThe tax falls to a smaller extent on the consumer than on the producer.

When can a product be said to have a negative income elasticity of demand?

• AWhen it is a luxury good.
• BWhen it is a necessity good.
• CWhen it is a normal good.
• DWhen it is an inferior good.

An indirect tax is imposed on good X.

Which situation is most likely to result in producers bearing a higher burden of the tax?

• Aprice elasticity of demand is elastic
• Bprice elasticity of demand is inelastic
• Cprice elasticity of supply is elastic
• Dprice elasticity of supply is inelastic

What is true for income elasticity of demand but not for price elasticity of demand?

• AIt helps firms differentiate between goods with elastic and inelastic demand.
• BIt helps firms differentiate between normal and inferior goods.
• CIt helps firms predict the changes in the quantity demanded.
• DIt helps firms predict the changes in sales revenues.

, , 8 A survey into the market for good X found that it is an inferior good and a close substitute for good Y.

Which values for the income elasticity of demand for good X and its cross elasticity of demand with respect to the price of good Y would support this?

cross elasticity of demand income elasticity of for good X with respect to demand for good X the price of good Y

• A–1.2 –0.9
• B–1.2 +0.9
• C+1.2 –0.9
• D+1.2 +0.9

The price of a good rises by 5% and the quantity of it demanded rises by 3%. At the same time, the incomes of consumers of the good rise by 4%.

The law of demand appears not to be working in this case.

What is the most likely explanation?

• AOther things did not remain equal.
• BThe demand for the good was price inelastic.
• CThe real price of the good fell.
• DThe time period was the very short run.

A decrease in the quantity demanded of a product results in a proportionate decrease in sales revenues.

What is true about its price elasticity of demand?

• AIt is between zero and one.
• BIt is infinite.
• CIt is unitary.
• DIt is zero.

Using the data in Table 1.1, calculate the price elasticity of demand (PED) for nickel between 2022 and the forecast for 2024. [2]

State what this estimate suggests about the PED for nickel and why this estimate might be considered ‘highly unusual’. [2]

A German car manufacturer is concerned about losing sales of EVs in the EU market to imports of EVs from China.

Assess the extent to which a knowledge of cross elasticity of demand (XED) might be of value to the German manufacturer when seeking to maintain sales in the EU market. [6]

Explain the factors affecting the cross elasticity of demand (XED) for a product and consider how useful XED is likely to be to the firm making this product. [8]

Assess whether price elasticity of demand (PED) or income elasticity of demand (YED) is likely to be of greater importance to a firm during a period of negative economic growth. [12]

(i) With the help of a formula, define the term income elasticity of demand. [2]

(ii) Using the information in the second paragraph, calculate the income elasticity of demand for fast food for one of the world’s largest restaurant companies in the US between 2019 and 2023 and state how an economist would classify fast food in the US based on this calculation. [2]

With the help of a formula, explain what is meant by price elasticity of demand for a product and consider the importance of time in determining whether demand for the product is likely to be relatively price elastic or relatively price inelastic. [8]

Assess whether knowledge of a product’s income elasticity of demand is more important to a firm producing it than knowledge of its cross elasticity of demand. [12]

(i) Identify one possible reason for the value of price elasticity of demand (PED) for chocolate. [1]

(ii) Calculate the percentage change in the value of global sales of chocolate between 2017 and 2026, as shown in Table 1.1. [1]

Assess the view that a business should be more concerned about the income elasticity of demand for its product than its cross elasticity of demand when incomes are falling. [12]

Firms will often try to estimate elasticity values to judge the possible success of decisions to change prices or to introduce new products.

Assess the extent to which an understanding of income elasticity of demand (YED) may be more useful than cross elasticity of demand (XED) in increasing the income from sales for a firm. [12]

With the help of a diagram, explain how changes in a subsidy can influence the price and quantity sold of a product in a market and consider how expenditure on a subsidy is affected by the price elasticity of demand for the product. [8]

Assess the extent to which knowledge of a product’s price elasticity of supply is the most useful measure of elasticity to a firm needing to react quickly to changes in its market. [12]

With the help of a formula, explain the meaning of price elasticity of demand and consider the significance to a firm of having price elastic or price inelastic demand for its product. [8]

Some restaurants and commercial kitchens are using sunflower oil as an alternative to olive oil.

Explain how economists could measure the impact of rising olive oil prices on the demand for sunflower oil. [2]