CH 4: Elasticity

Question 1

Elasticity

Answer 1

measures sensitivity of quantity demanded to price changes

Question 2

Price elasticity of demand

Answer 2

% change in Qd/
% change in P

Question 3

Elastic

Answer 3

Price elasticity (Ep) >1

Sensitive

small price change results in large change in quantity demanded

If elastic, then lower price to increase revenue

Question 4

Inelastic

Answer 4

Ep<1

Less sensitive

if inelastic, then raise price to raise revenue

Question 5

Unitary Elastic

Answer 5

Ep = 1

Question 6

factors affecting elasticity

Answer 6

1. Necessities vs. luxuries
2. availability of close substitutes
3. importance of the good in consumer’s budget
4. Time horizon (length of time)