Chapter 3 - Elasticity

Question 1

What is price elasticity of demand?

Answer 1

It is the measure of how responsive consumer’s demand quantity is to change in the price of a product. Price elasticity looks at the % change.

Question 2

Why is price elasticity conducted in percentages?

Answer 2

Because it removes the need for everything to be expressed in the same units and allows different products to be compared.

Question 3

What is the rule relating to negative numbers?

Answer 3

We ignore the minus sign as it is the whole value that is important.

Question 4

What is elastic demand?

Answer 4

When Ed > 1 - so the change in price results in a larger percentage change in quantity demanded.

Question 5

What is inelastic demand?

Answer 5

When Ed < 1 so the change in price results in a relatively smaller percentage change in quantity demanded.

Question 6

What is unit elasticity

Answer 6

When Ed = 1, which means the change in price is the same as the change in quantity demanded.

Question 7

How would perfect inelastic demand be drawn on a graph.

Answer 7

A straight horizontal line as the quantity doesn’t change dependant on price.

Question 8

How would perfect elastic demand be drawn on a graph?

Answer 8

A straight vertical line as the price doesn’t change dependant on quantity demanded.

Question 9

How does the total revenue test show whether demand is elastic, inelastic or unit elasticity?

Answer 9

Elastic demand will move in the opposite direction to a demand graph, unit elasticity will not change total revenue (so will be flat) and inelastic demand will move in the same direction as a demand graph.

Question 10

What is an example of elastic demand?

Answer 10

Movies / air travel

Question 11

What is an example of inelastic demand?

Answer 11

Medical care

Question 12

What are the determinants of price elasticity of demand?

Answer 12

• Substitutability - goods with substitutes have higher elasticity of demand
• Proportion of income - price of good relative to budget, the higher the elasticity
• Luxuries vs necessities - luxuries have higher elasticity and necessities tend to be inelastic.
• Time - the longer the period of time under consideration the higher the elasticity.

Question 13

How is elasticity of demand calculated

Answer 13

Ed = percentage change in quantity demanded of Product X / percentage change in price of product X

Question 14

How is elasticity of supply calculated?

Answer 14

Es = percentage change in quantity supplied of product X / percentage change in price of product X

Question 15

How is elastic supply and inelastic supply determined?

Answer 15

Es > 1 = elastic supply and Es < 1 = inelastic supply.

Question 16

What is the market period?

Answer 16

It is a period of time in which producers of a product are unable to change the quantity produced in response to a change in its price.

Question 17

What is the short run?

Answer 17

It is a period of time in which at least one factor of production can be fixed, so supply starts to move from being completely inelastic to elastic.

Question 18

What is the long run?

Answer 18

It is a period of time in which all necessary adjustments to factors of production can be made. Supply elasticity will be greater as all adjustments can be made.

Question 19

what is the cross-price elasticity of demand?

Answer 19

It is a measure of how sensitive consumer purchasers of one product (X) are to the change in the price of some other product (Y).

Question 20

How is the cross-price elasticity of demand calculated?

Answer 20

Exy = percentage change in quantity demanded of product X / percentage change in price of product Y

Question 21

By using this calculation how can we determine what type of goods they are?

Answer 21

If the demand is positive, then they are substitute goods. If the demand is negative they are complementary goods, and if the change is zero or near zero, they are independent goods.

Question 22

What is income elasticity of demand?

Answer 22

This s a measure of how responsive consumers’ demand for a product is to a change in their income (i)

Question 23

How is income elasticity of demand calculated?

Answer 23

Ei = percentage change in quantity demanded of product X / percentage change in income (i)

Question 24

What does this calculation tell us about the goods?

Answer 24

Normal or superior goods will show a positive coefficient and inferior goods will show a negative coefficient.

Question 25

Cet Par explain why high-income households will tend to have lower price elasticities of demand for food compared with low-income households?

Answer 25

Because food expenditure would constitute a smaller percentage of their total income and therefore they are less likely to feel an increase or decrease to food prices as compared to a low-income household.

Question 26

What are the major determinants of price elasticity of demand?

Answer 26

They are the number of available substitutes, the size of an item in the household’s budget, whether the product is a luxury or a necessity and the time period involved in the products consumption.

Question 27

Why is it difficult to judge elasticity of demand or supply if you are merely observing the appearance of a demand or supply curve on a graph?

Answer 27

Because the change of a demand curve is based on absolute changes in price and quantity whereas elasticity has to do with percentage changes in price and quantity.

Question 28

Into what periods do we divide supply when discussing the elasticity of supply?

Answer 28

Market (immediate) period, short run and long run

Question 29

What are the characteristics of these periods?

Answer 29

In the market period no changes can be made to change supply, in the short run, at least one aspect of supply can be changed and in the long run, all aspects of supply are changed.

Question 30

What information do cross-price elasticity and income elasticity of demand convey?

Answer 30

Measures how sensitive the purchases of one product are to the price of another product and is measured by dividing the percentage change in the quantity demanded of product X by the percentage change in the price of product Y.

Question 31

What is the significance of the signs on the cross-price elasticity measures?

Answer 31

Positive cross-price elasticity identifies substitute goods and negative cross-price elasticity identifies complementary goods.

Question 32

What does income elasticity measure?

Answer 32

the responsiveness of quantity demanded to changes in income.

Question 33

What is the significance of the signs on income elasticity measures?

Answer 33

Is positive for normal or superior goods and services, and is negative for inferior ones.