1 - Elasticity

Question 1

The law of demand

Answer 1

The negative relationship between price and quantity demanded

Question 2

Formula for price elasticity of demand (PED)

Answer 2

%change in quantity demanded / %change in price

OR

Change in quantity demanded / change in price x price / quantity demanded

(-b x P/Q)

Question 3

Equation for a linear demand curve

Answer 3

Q = a - bp

b = the slope

Question 4

What does the slope (b) equal

Answer 4

Change in quantity demanded / change in price

Question 5

What does a Horizontal demand curve show

Answer 5

Perfectly elastic demand

• if price rises slightly above P*, demand falls to 0

Question 6

What does a vertical demand curve show

Answer 6

Perfectly inelastic demand

• if price rises, demand is unchanged (essential goods)

Question 7

Formula for income elasticity of demand (YED)

Answer 7

Percentage change in quantity demanded / percentage change in income

OR

Change in quantity demanded / change in income x income / quantity demanded

Question 8

Cross price elasticity

If the answers negative what does that mean

Answer 8

The goods are complements (xbox and an Xbox game)

Question 9

Cross price elasticity

If the answers positive what does that mean

Answer 9

Goods are substitutes (apple and orange)

Question 10

Formula for cross price elasticity

Answer 10

It’s the same as PED but you input the numbers they give to compare

Change in quantity / change in price x P/Q

Slope x P/Q