Chapter 4

Question 1

What does price elasticity of demand measure?

Answer 1

The responsiveness and sensitivity of consumers to a price change is measured by a products price elasticity of demand

Question 2

What is price elasticity of demand?

Answer 2

Price elasticity of demand is a tool to measure the responsiveness of quantity demanded to changes in price and to help suppliers in decisions. By how much does quantity demanded change due to a change in price

Question 3

What is elasticity?

Answer 3

Elasticity means the responsiveness or sensitivity

Question 4

What is relative elastic?

Answer 4

When a modest change in price causes a large change in quantity demanded it is relatively elastic

Question 5

What is relative inelastic?

Answer 5

When there is a substantial change in price that causes a small change in quantity demanded it is relatively inelastic

Question 6

What is the calculation of price elasticity of demand?

Answer 6

Price elasticity of demand calculation : PED= % change in Qd / % change in P

Question 7

What is constant about price elasticity demand equation?

Answer 7

Price elasticity demand is an equation that must be negative due to the law of demand.
It measures the sensitivity of the change in demand between two points due to a price change.

Question 8

Why do you use percentage rather than absolute values in price of elasticity demanded?

Answer 8

We use percentage rather than absolute values in measuring consumers responsiveness because if we use absolute changes, the choice of units will arbitrarily change affect our impression of buyer responsiveness and because by using percentage we can compare consumers responsiveness to changes in the prices of different products.

Question 9

When and why do we ignore the negative sign of price elasticity of demand?

Answer 9

In price elasticity of demand we ignore the minus sign that shows the relationship between price and quantity. This means at the end of the equation all elasticity of supply coefficients therefore are positive numbers.

Question 10

What is perfectly inelastic quantity demand?

Answer 10

Perfectly inelastic is when the quantity demanded does not change if the price increases or decreases, there is no response to price. The PED = 0. The demand curve will be a vertical line (ll). These are items that are always in demand, water and medicine.

Question 11

What is unit elastic quantity demanded?

Answer 11

Unit elasticity is when PED = 1 because the percentage change of price and quantity demanded is equal. These are items that are necessary in the modern world

Question 12

What is relative inelasticity quantity demanded?

Answer 12

Relative inelasticity is when the PED is greater than 0 but less than 1 (Ed<1), the demand curve will be steeper. These are for items that are necessities.

Question 13

What is relative elasticity quantity demanded?

Answer 13

Relative elasticity is when the PED is greater than 1 but less than infinity (Ed>1), the demand curve has a falter curve and the quantity demanded change is big when there is a change in price. These are for items that are substitutes, luxury goods.

Question 14

What is perfect elasticity quantity demanded?

Answer 14

Perfect elasticity of when PED equals infinity (PED=), when there’s even a small change in price, there is an infinite change in quantity demand. The demand curve is horizontal (–). These are items with perfect substitutes, they are many identical products for goods

Question 15

What’s the difference between inelastic and elastic?

Answer 15

Elastic refers to a small change in Qd while inelastic refers to a small change in Qd

Question 16

How does price elasticity and business decisions relate?

Answer 16

Price elasticity helps make pricing decisions, this will depend on if the good is demand elastic or inelastic

Question 17

What is the importance of elasticity in relation to revenue?

Answer 17

The importance of elasticity for firms relates to the effect of price changes on total revenue and thus on profits. Total revenue is the amount the seller receives from the sale of the product in a particular time period

Question 18

What is the total revenue calculation?

Answer 18

Total Revenue = Price x Quantity demand

Question 19

What is the total revenue test of elastic demand?

Answer 19

If the total revenue changes in the opposite direction from price, demand is elastic. A decrease in price will increase total revenue. Ceteris paribus, when price and total revenue move in opposite directions demand is elastic

Question 20

What is the total revenue test of inelastic demand?

Answer 20

If the total revenue changes in the same direction as price, demand is inelastic. A price decrease will reduce total revenue. The increase in sales will not fully offset the decrease in price and total revenue will decline. Ceteris paribus, when price and total revenue move in the same direction, demand is inelastic.

Question 21

What is the total revenue test of unit elastic demand?

Answer 21

If the total revenue does not change when prices change, demand is unit elastic. An increase or decrease in price leaves total revenue unchanged. Ceteris paribus, when price changes and total revenue remains constant, demand is unit elastic

Question 22

What are the determinants of price elasticity of demand?

Answer 22

Determinants of PED:
1. Substitutability
2. Proportion of income
3. Luxuries versus necessities
4. Time

Question 23

What is substitutability as a determinate of price elasticity of demand?

Answer 23

Substitutability is that the larger the number of substitute goods that are available, the greater the price elasticity of demand. This depends on how narrowly the product is defined

Question 24

What is proportion of income as a determinate of price elasticity of demand?

Answer 24

Ceteris paribus, the higher the price of a good relative to consumers incomes, the greater the price elasticity of demand

Question 25

What is luxury rather than a necessity as a determinate of price elasticity of demand?

Answer 25

The more a good is considered to be a luxury rather than a necessity, the greater is the price elasticity of demand

Question 26

What is time as a determinate of price elasticity of demand?

Answer 26

Product demanded is more elastic the longer the time period under consideration. Consumers often need time to adjust in prices due to product durability.

Question 27

What is cross elasticity of demand?

Answer 27

Cross elasticity of demand (XED) measures how sensitive consume purchase of one product (product X) are to a change in the price of some other product (product Y)

Question 28

How do you calculate cross elasticity of demand?

Answer 28

Exy= %Qd of X / %P of Y

Question 29

What is the positive cross elasticity coefficient?

Answer 29

In substitute goods when the price of the one good increases/decreases the quantity demanded of the substitute good increases/decreases and the XED will always be positive. The larger the positive cross-elasticity coefficient, the greater is the substitutability between the two products.

Question 30

What is the negative cross elasticity coefficient?

Answer 30

In complementary goods when the price of one good decreases/increases the quantity demanded of the other will increase/decrease. The XED will always be negative. The larger the negative cross-elasticity coefficient, the greater are the complementarities between the two goods.

Question 31

What is the zero cross elasticity coefficient?

Answer 31

In independent goods when a zero or near zero cross elasticity suggests that the two products being considered are unrelated or independent goods.

Question 32

What is income elasticity?

Answer 32

Income elasticity of demand (YED) does not take into account the price it measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good

Question 33

How do calculate income elasticity?

Answer 33

Ei= %Qd of X / % of Y (income)

Question 34

What is the positive income elasticity?

Answer 34

Normal goods are when your income increases and your quantity demanded increases as well. The YED will always be positive, meaning the more of them are demanded as incomes rise.

Question 35

What is the negative income elasticity?

Answer 35

Inferior goods is when your income increases your quantity demanded of that good decreases. The YED will always be negative, meaning consumers decrease their purchase of inferior goods as incomes rise.