2.6-Elasticity

Question 1

What is elasticity in economics?

Answer 1

Elasticity measures how much the quantity demanded or supplied of a good responds to changes in price or other factors.

Question 2

What does price elasticity of demand (PED) measure?

Answer 2

PED measures the responsiveness of the quantity demanded of a good to a change in its price.

Question 3

What is the formula for calculating price elasticity of demand?

Answer 3

PED = (% Change in Quantity Demanded) / (% Change in Price)

Question 4

If PED is greater than 1, what type of demand is it?

Answer 4

Elastic demand.

Question 5

If PED is less than 1, what type of demand is it?

Answer 5

Inelastic demand.

Question 6

What does unitary elasticity mean?

Answer 6

Unitary elasticity occurs when PED equals 1, meaning the percentage change in quantity demanded is equal to the percentage change in price.

Question 7

True or False: A perfectly elastic demand curve is horizontal.

Answer 7

True.

Question 8

True or False: A perfectly inelastic demand curve is vertical.

Answer 8

True.

Question 9

What factors affect price elasticity of demand?

Answer 9

Factors include availability of substitutes, necessity vs luxury, proportion of income spent, and time period.

Question 10

What is cross-price elasticity of demand?

Answer 10

Cross-price elasticity measures the responsiveness of the quantity demanded of one good to a change in the price of another good.

Question 11

How is cross-price elasticity calculated?

Answer 11

Cross-price elasticity = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)

Question 12

What does a positive cross-price elasticity indicate?

Answer 12

It indicates that the two goods are substitutes.

Question 13

What does a negative cross-price elasticity indicate?

Answer 13

It indicates that the two goods are complements.

Question 14

What is income elasticity of demand?

Answer 14

Income elasticity measures the responsiveness of quantity demanded to a change in consumer income.

Question 15

What is the formula for income elasticity of demand?

Answer 15

Income elasticity = (% Change in Quantity Demanded) / (% Change in Income)

Question 16

If income elasticity is greater than 1, what type of good is it?

Answer 16

A luxury good.

Question 17

If income elasticity is less than 1 but greater than 0, what type of good is it?

Answer 17

A normal good.

Question 18

If income elasticity is negative, what type of good is it?

Answer 18

An inferior good.

Question 19

What is the price elasticity of supply (PES)?

Answer 19

PES measures the responsiveness of the quantity supplied of a good to a change in its price.

Question 20

What is the formula for calculating price elasticity of supply?

Answer 20

PES = (% Change in Quantity Supplied) / (% Change in Price)

Question 21

What does it mean if PES is greater than 1?

Answer 21

It indicates elastic supply.

Question 22

What does it mean if PES is less than 1?

Answer 22

It indicates inelastic supply.

Question 23

What is the significance of time in determining PES?

Answer 23

Supply tends to be more elastic in the long run than in the short run.

Question 24

True or False: A vertical supply curve indicates perfectly elastic supply.

Answer 24

False.

Question 25

True or False: A horizontal supply curve indicates perfectly inelastic supply.

Answer 25

False.

Question 26

What role do production costs play in elasticity?

Answer 26

Higher production costs can lead to more inelastic supply.

Question 27

How does the availability of factors of production affect PES?

Answer 27

More available factors of production can make supply more elastic.

Question 28

What is the relationship between elasticity and total revenue for elastic demand?

Answer 28

For elastic demand, an increase in price leads to a decrease in total revenue.

Question 29

What is the relationship between elasticity and total revenue for inelastic demand?

Answer 29

For inelastic demand, an increase in price leads to an increase in total revenue.

Question 30

What is the relationship between elasticity and total revenue for unitary elasticity?

Answer 30

For unitary elasticity, total revenue remains constant when price changes.

Question 31

What is the concept of elasticity in relation to consumer choice?

Answer 31

Elasticity helps to understand how consumers adjust their purchasing behavior in response to price changes.

Question 32

How does elasticity impact business pricing strategies?

Answer 32

Understanding elasticity helps businesses decide whether to raise or lower prices to maximize revenue.

Question 33

What is the importance of elasticity in public policy?

Answer 33

Elasticity informs policymakers about the potential effects of taxes and subsidies on consumer behavior.

Question 34

What is the significance of the midpoint method in calculating elasticity?

Answer 34

The midpoint method provides a more accurate measure of elasticity by averaging the starting and ending prices and quantities.

Question 35

Fill in the blank: The higher the number of substitutes available for a good, the more _________ its demand is.

Answer 35

elastic.

Question 36

Fill in the blank: Goods that are necessities tend to have _________ demand.

Answer 36

inelastic.

Question 37

What is the effect of a time lag on supply elasticity?

Answer 37

Supply may be more inelastic in the short term due to production constraints.

Question 38

What does a supply curve that is steep indicate about elasticity?

Answer 38

It indicates inelastic supply.

Question 39

How do luxury goods typically respond to changes in income?

Answer 39

Luxury goods typically have a high positive income elasticity.