Ch. 5 - Elasticity

Question 1

What is the Price Elasticity of Demand?

Answer 1

A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change

(% Change in quantity demanded) / (% Change in price) ((Absolute Value))

Question 2

What does it mean for Demand to be Elastic?

Answer 2

When the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price, which means that the absolute value of the price elasticity > 1

• When quantity is very responsive, demand is elastic
• Elastic demand curves are relatively flatter than inelastic demand curves

Question 3

What does it mean for Demand to be Inelastic?

Answer 3

When the absolute value of the percent change in quantity is smaller than the absolute value of the percent change in price, which means that the absolute value of the price elasticity < 1

• When quantity is very unresponsive, demand is inelastic
• Inelastic demand curves are more slanted than elastic demand curves

Question 4

What does it mean to be Perfectly Elastic? Perfectly Inelastic? What does each demand curve look like?

Answer 4

Perfectly Elastic - When any change in price leads to an infinitely large change in quantity

• When the demand curve is completely horizontal, price elasticity of demand is infinate

Perfectly Inelastic - When quantity does not respond at all to a price change

• When the demand curve is completely vertical, no matter the change in price, total quantity demanded is unchanged

Question 5

What are the 5 Determinants of the Price Elasticity of Demand?

Answer 5

1. More competing products/substitutes mean greater elasticity
2. Specific brands tend to have more elastic demand than categories of goods
3. Necessities have less elastic demand
4. Consumer search makes demand more elastic
5. Demand gets more elastic over time

Question 6

Total Revenue = …

Also, What do higher prices lead to if demand is elastic vs inelastic?

Answer 6

Price X Quantity

• Higher prices lead to less total revenue if demand is elastic
• Higher prices lead to more total revenue is demand is inelastic

Question 7

What is the Cross-Price Elasticity of Demand?

Answer 7

A measure of how responsive the demand of one good is to price changes of another. It measures the percent change in quantity demanded that follows from a 1% change in the price of another good

(% Change in quantity demanded of one good) / (% Change in price of another good)

• When it’s positive buy more of a good when the price of another goes up
• When it’s negative, buy less

Question 8

Cross-Price Elasticity is ________ for substitutes, ________ for compliments, near ____ for independent goods

positive, negative, zero

Answer 8

positive, negative, zero

Question 9

What is Income Elasticity of Demand?

Answer 9

A measure of how responsive the demand for a good is to changes in income. It measures the percent change in quantity demanded that follows from a 1% change in income

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

Question 10

Income Elasticity is _______ for normal goods, ________ for inferior goods

positive, negative

Answer 10

positive, negative

Question 11

What is Price Elasticity of Supply?

Answer 11

A measure of how responsive sellers are to price changes. It measures the percent change in quantity supplied that follows from a 1% price change

(% Change in quantity supplied) / (% Change in price)

• Price Elasticity is positive
• Quantity is relatively unresponsive when supply is inelastic
• Flexibility determines the price elasticity of supply

Question 12

What are the 5 Determinants of Price Elasticity of Supply?

Answer 12

1. Inventories make supply more elastic
2. Easily available variable inputs make supply elastic
3. Extra capacity makes supply more elastic
4. Easy entry & exit makes supply more elastic
5. Over time, supply becomes more elastic