CH4 - Elasticity

Question 1

When is a good elastic?

Answer 1

A good is said to be elastic when quantity demanded is quite responsive to changes in price.

Question 2

When is a good inelastic?

Answer 2

A good is said to be inelastic when quantity demanded is unresponsive to changes in price

Question 3

What are the effects of a reduction in supply on a good where the demand is elastic?

Answer 3

The effect of reduction supply is a slight rise in price and a large decrease in quantity

Question 4

What are the effects of a reduction in supply on a good where the demand is inelastic?

Answer 4

The effect of reduction supply is a slight rise in price and a large decrease in quantity

Question 5

What is the formula for price elasticity of demand?

Answer 5

N = ( % change in Q demanded) / (% change in P)

Question 6

What is the formula for elasticity of price?

Answer 6

N = ( % change in Q) / (% change in p)

Question 7

When η<1, demand is

Answer 7

Inelastic

Question 8

When η>1, demand is

Answer 8

Elastic

Question 9

When η=1, demand is

Answer 9

Unit elastic

Question 10

The closer you got to the … axis, elasticity approaches …

Answer 10

The closer you get to the vertical axis, elasticity approaches oo

Question 11

When demand curve is horizontal, η is equal to what?

Answer 11

η=oo

Question 12

When demand curve is vertical, η is equal to what

Answer 12

η=0

Question 13

What determines elasticity of demand?

Answer 13

1. Availability of substitutes
   Change in price of X w substitutes remaining constant => X will be substituted
   Products defined more broadly have more substitutes so more elastic
2. Importance in consumer’s budget
   small fraction = inelastic demands
   large fraction = elastic demands
3. Time period - short vs long run
   Inelastic in short run can become elastic over time

Question 14

What does it mean when something is perfectly inelastic?

Answer 14

Quantity demanded doesnt change as price changes.
Demand curve is vertical
η=0

Question 15

What does it mean when something is inelastic?

Answer 15

% change in Q demanded is smaller than % change in P
0 < η < 1

Question 16

What does it mean when something it unit elastic?

Answer 16

The % change in Q demanded is equal to the % change in P
η=1

Question 17

What does it mean when something is elastic?

Answer 17

% change in Q demanded is larger than the % change in price
η>1

Question 18

What does it mean when something is perfectly elastic?

Answer 18

Buyers are prepared to buy all they can at the given price.
Demand curve is horizontal
η=oo

Question 19

What is the formula for total expenditure?

Answer 19

Total expenditure = price x quantity

Question 20

What effect does a reduction in price and elasticity of price have on total expenditure?

Answer 20

If demand for a product is inelastic, a reduction in price leads to a decline in total expenditure.
If demand for a product is elastic, a reduction in price leads to an increase in total expenditure.

Question 21

What does a vertical supply curve imply?

Answer 21

Quantity supplied does not change as price changes = supply is inelastic

Question 22

What does a horizontal supply curve imply

Answer 22

There is an infinite elasticity of supply

Question 23

What are 2 determinants of elasticity of supply?

Answer 23

1. ease of substitution
   If the price of a product rises, how much more can firms produce profitably? This depends in part on how easy it is for firms to shift from the production of other products to the one whose price has risen.
2. short run and long run
   It may be difficult to change quantity supplied in response to a price increase in a matter of weeks or months but easy to do so over years.
   The long-run supply for a product is more elastic than the short-run supply

Question 24

When is Price elasticity of Supply perfectly inelastic?

Answer 24

Ns = 0
Q supplied doesnt change as price changes
supply curve is vertical

Question 25

When is Price elasticity of supply inelastic?

Answer 25

0 < Ns < 1 % change in Q supplied is smaller than the percentage change in price

Question 26

When is price elasticity of supply unit elastic?

Answer 26

Ns = 1 % change in quantity supplied is = to % change in price

Question 27

When is price elasticity of supply elastic?

Answer 27

Ns > 1 % change in Q supplied is larger than the % change in price

Question 28

When is price elasticity of supply perfectly elastic

Answer 28

Ns = infinity Sellers are prepared to sell all they can at given price Supply curve is horizontal

Question 29

What is an excise tax?

Answer 29

Tax on the sale of a particular product

Question 30

What is tax incidence?

Answer 30

Location of the burden of a tax, that is, the identity of the ultimate bearer of the tax

Question 31

When do consumers bear most of the burden of excise taxes, and when is it producers?

Answer 31

When demand is inelastic relative to supply, consumers bear most of the burden of excise taxes. When supply is inelastic relative to demand, producers bear most of the burden.

Question 32

What effect does an increase in wages have on the demand and supply curve?

Answer 32

An increase in wages will shift the demand curve to the right and the supply curve to the left

Question 33

What do you measure with the income elasticity of demand?

Answer 33

A measure of the responsiveness of quantity demanded to a change in income

Question 34

What happens to demand for normal goods as income rises?

Answer 34

good for which Q demanded rises as income rises = income elasticity is positive

Question 35

What happens to demand for inferior goods as income rises?

Answer 35

Good for which q demanded falls as income rises = income elasticity is negative

Question 36

How do you distinguish necessities from luxuries in terms of elasticity? (normal goods)

Answer 36

Necessities: products for which the income elasticity of demand is positive but less than one Luxuries: products for which the income elasticity of demand is positive and greater than one

Question 37

What is the formula for cross elasticity of demand?

Answer 37

Nxy = (%change in Q demanded of good x) / (%change in P of good y)

Question 38

Is the cross elasticity for complementary products positive or negative?

Answer 38

Negative When price of one good rises, the quantity demanded of other good falls

Question 39

Is the cross elasticity for substitute products positive or negative?

Answer 39

Positive When price of one good rises, Q demanded of other good increases