3: Elasticity and its Applications

Question 1

if demand is inelastic, when the price rises

Answer 1

the demand decreases proportionally less so the total revenue increases

Question 2

elastic demand is for what type of goods? (two points)

Answer 2

non essential product with many satisfactory substitutes

Question 3

Who holds the power in inelastic and elastic markets respectively?

Answer 3

inelastic: supplier, elastic: consumers

Question 4

what type of goods have an inelastic demand curve?

Answer 4

essential goods with no satisfactory substitutes

Question 5

how to calculate elasticity

Answer 5

%change in quantity demanded/%change in price

the %change is the new demand/price divided by the mean of the old and new demand/price

Question 6

if elasticity is

Answer 6

it is an inelastic demand

Question 7

if elasticity > 1

Answer 7

demand is elastic

Question 8

If demand is elastic, an increase in price leads to

Answer 8

a proportionally larger decrease in demand so total revenue decreases

Question 9

if elasticity is 2, a 10% increase in price will lead to

Answer 9

a 20% decrease in quantity demanded

Question 10

What is the cross price elasticity of demand?

Answer 10

The responsiveness of quantity demanded to a given change of price in another good (which is complementary or a substitute)

%change in demand of X/%change price of Y, where %change is the difference divided by the avg of the new and old values.

Question 11

if the cross elasticity is positive then the two products must be

Answer 11

substitutes

Question 12

for complements, the cross elasticity is always

Answer 12

negative

Question 13

a perfectly inelastic supply is

Answer 13

a vertical line; any price has the same supply

Question 14

elastic supply is

Answer 14

an increase in price leads to a proportionally larger increase in quantity supplied

Question 15

income elasticity of demand is

Answer 15

the responsiveness of quantity demanded of a good to changes in income

Question 16

an increase in income leads to a larger demand of what kind of goods in richer countries? what kind of good has less change in richer countries?

Answer 16

durable goods and services demand increases; basic needs and clothing demand do not increase as much

Question 17

calculate the income elasticity of demand

Answer 17

change in demand/change in income

Question 18

what goods have positive income elasticities of demand, and which have negative

Answer 18

normal goods have positive, inferior have negative

Question 19

when income is too low, the income elasticity is

Answer 19

0

Question 20

at very high income, what happens to the income elasticity of ceiling fans?

Answer 20

becomes negative as the ceiling fan becomes an inferior good (versus a/c)

Question 21

what is the effect of the government setting a price ceiling lower than the equilibrium price?

Answer 21

leads to a shortage as suppliers sell less as demand increases. Shortage can lead to the black market, paying more for the short supply goods

Question 22

a price ceiling above equilibrium point will

Answer 22

have no effect on the market

Question 23

What is the effect of a price floor higher than the equilibrium point?

Answer 23

A surplus

Question 24

What is the effect of a price floor below the equilibrium point?

Answer 24

no effect

Question 25

What happens to market equilibrium when a tax is imposed?

Answer 25

cost of production increases so the supply curve shifts up and the equilibrium point moves left up (less quantity and higher price)

Question 26

who is liable to pay tax?

Answer 26

the seller

Question 27

who ends up paying the tax?

Answer 27

both the consumer and the seller

Question 28

who pays more of the tax?

Answer 28

inelastic demand: buyer pays more, elastic: seller pays more (due to market power)

Question 29

effects of shifts in supply curve for inelastic and elastic demands

Answer 29

inelastic: large effect on price, small effect on quantity; elastic: small effect on price, large effect on price

Question 30

what type of good has more total tax?

Answer 30

inelastic goods

Question 31

calculating percentage change in quantity

Answer 31

change in quantity/the mean of the old and new quantities

delta Q / (Q1 + Q2) / 2