Ch. 6 Elasticity

Question 1

Elasticity

Answer 1

measure of how much one economic variable responds to changes in another economic variable

Question 2

Price Elasticity of Demand

Answer 2

the responsiveness of quantity demanded in response to price change
(measured by dividing percent change in quantity demanded by percent change in price)

Question 3

Elastic Demand

Answer 3

when percent change in quantity demanded is greater than percent change in price
(price elasticity is greater than 1)

Question 4

Inelastic Demand

Answer 4

when percent change in quantity demanded in less than percent change in price
(price elasticity is less than 1)

Question 5

Unit-Elastic Demand

Answer 5

when percent change in quantity demanded is equal to percent change in price
(price elasticity = 1)

Question 6

Perfectly Inelastic Demand

Answer 6

where quantity demanded is completely unresponsive to price

price elasticity = 0

Question 7

Perfectly Elastic Demand

Answer 7

where quantity demanded is infinitely responsive to price

price elasticity is infinity

Question 8

Key Determinates of Price Elasticity

Answer 8

• availability of close substitutes
• passage of time
• luxuries vs necessities
• definition of the market
• share of good in consumer budget

Question 9

Total Revenue

Answer 9

total amount of funds a seller receives from selling a good/service
(Price per unit * Number of units sold)

Question 10

Price and Total Revenue Relationship

Answer 10

• Inelastic demand: price and total revenue are proportional

- Elastic demand: price and total revenue inversely proportional

Question 11

Cross-Price Elasticity of Demand

Answer 11

measures responsiveness of the quantity demanded on one product based on a change in price for a second product

Question 12

Cross-Price Elasticity Results (3)

Answer 12

1. If substitutes, value will be positive
2. If compliments, value will be negative
3. If unrelated products, value will be zero

Question 13

Income Elasticity of Demand

Answer 13

measures responsiveness of quantity demanded to changes in income

Question 14

Income Elasticity of Demand Results (3)

Answer 14

1. Between 0 and 1 for normal, necessity good
2. Greater than 1 for normal, luxury goods
3. Negative for inferior goods

Question 15

Price Elasticity of Supply

Answer 15

responsiveness of quantity supplied to a change in price

-% change in Q.S. divided by % change in price

Question 16

Close Substitutes Effect on Demand

Answer 16

• if many close substitutes available, more elastic demand

- if few substitutes, less elastic demand

Question 17

Passage of Time Effect on Demand

Answer 17

the more time, the more elastic the demand will be

Question 18

Luxuries vs Necessities and Demand

Answer 18

• luxury goods have more elastic demand

- necessities have less elastic demand

Question 19

Definition of Market and Demand

Answer 19

the more narrowly defined the market is, the more substitutes there are, making the demand more elastic

Question 20

Share of a Good and Demand

Answer 20

the larger the share of a good in a budget, the more elastic the demand will be