3) CH5 Elasticity and its applications

Question 1

What is elasticity?

Answer 1

It is measure of how much buyers and sellers respond to changes in market conditions.

It is a quantitative approach.

Question 2

What is the price elasticity of demand?

Answer 2

It is a measure of how much the quantity demanded of a good responds to a change in the price of that good.

% change in quantity D divided by the % change in price.

Question 3

What are the determinants for the price elasticity of D?

Answer 3

• Availability of close substitutes
• Necessities vs luxuries
• Definition of the market
• Time horizon

Question 4

When does the price elasticty of D tends to be more elastic?

Answer 4

• Large number of close substitutes
• If the good is a luxury one
• The more narrowly defined the market
• The longer the time period

Question 5

How do you compute the price elasticity of D?

Answer 5

Question 6

How do you compute bthe elasticity with the midpoint method?

Answer 6

Question 7

When is the price inelastic to D?

Answer 7

• Quantity D does not respond strongly to price changes
• Price elasticity of D is less than 1

Question 8

When is p elastic to D?

Answer 8

• Q D responds strongly to changes in price
• P elasticity of D is greater than 1

Question 9

When is the price perfectly inelastic?

Answer 9

Q D does not respond to P changes.

Question 10

When is price perfectly elastic?

Answer 10

Q D changes infintely with any change in price

Question 11

When is the price unit elastic?

Answer 11

Q D changes by the same % as the price.

Question 12

To which mathematical indicator is the P elasticity of D related?

Answer 12

The slope of the D curve.

Question 13

What is the total revenue?

How do you compute it?

Answer 13

Amount paid by buyers and received by sellers of a good.

TR = P*Q

Question 14

What happens to the total revenue when there is a increase of price and the D is inelastic.

Answer 14

This leads to a descreas in Q, proportionnely smaller, thus, the TR increases.

Question 15

What happens to the total revenue when there is an increase of price and the D is ealstic?

Answer 15

There is a decrease of Q, proportionely larger, the TR decreases.

Question 16

What is Income elasticity of D?

Answer 16

Measure of how much the Q D for a good responds to a change in consumer’s income.

% of the Q D divided by the % change in I.

Question 17

What is the formula of D elasticity of I?

Answer 17

Question 18

What happens to necessity goods, looking at the D elasticity of I?

Luxury goods?

Answer 18

They tend to be inelastic.

They tend to be elastic.

Question 19

What is the price elasticity of supply?

Answer 19

Measure of how much the quantity supplied for a good responds to a change in the p of that good.

% change in Q S resulting from 1 % change in price.

Question 20

Price elasticity of supply: inelastic

Answer 20

Question 21

Price elasticity of supply: less than 1

Answer 21

Question 22

Price elasticity of supply: equals 1

Answer 22

Question 23

Price elasticity of supply: gretaer than 1

Answer 23

Question 24

Price elasticity of supply: elasticity equals infinity

Answer 24

Question 25

What are the determinants of p elasticity of D?

Answer 25

• Ability of sellers to change the amount of the good they produce
• Time period (S is more price elastic in the long-term).

Question 26

What are the three steps to analyze an elasticity?

Answer 26

1. Examine wether the S or D curve shifts
2. Determine the direction of the shift of the curve
3. Use the S & D diagram to see how the market Equilibrium changes.

Question 27

Summary 1:

Answer 27

Question 28

Summary 2:

Answer 28

Question 29

Summary 3:

Answer 29