Chapter 4

Question 1

Price elasticity of demand

Answer 1

The units-free measure of of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same.

Question 2

Formula for price elasticity of demand

Answer 2

Price elasticity of demand = ∆Qd / ∆P

Question 3

Perfectly inelastic demand

Answer 3

If the Qd remains constant when the price changes

Question 4

Unit elastic demand

Answer 4

If the percentage change in the quantity demanded equals the percentage change in the price.

Question 5

Inelastic demand

Answer 5

The percentage change in Qd is less than the percentage change in the price.

Question 6

Perfectly elastic demand

Answer 6

If the Qd changes by an infinitely large percentage in response to a tiny price change.

Question 7

Elastic demand

Answer 7

If the % ∆Qd exceeds the % ∆P

Question 8

The elasticity of demand depends on:

Answer 8

• The closeness of substitutes
• The proportion of income spent on the good
• The time elapsed since the price change

Question 9

Total revenue

Answer 9

Total price of a good multiplied by the quantity sold.

Question 10

Total revenue test.

Answer 10

A method of estimating the price elasticity of demand by observing the change in the price, when all other influences on the quantity sold remain the same.

Question 11

Price cuts and elasticity and what they imply of demand elasticity

Answer 11

• Price cut increases total revenue: demand is elastic
• Price cut decreases total revenue: demand is inelastic
• Price cut leaves total revenue unchanged: demand is unit elastic

Question 12

Income elasticity of demand

Answer 12

A measure of the responsiveness of the demand for a good or service to a change in income, ceteris paribus.

Question 13

Income elasticity of demand formula:

Answer 13

Income elasticity of demand = % ∆Qd / % ∆Income

Question 14

Income elasticity ranges:

Answer 14

> 1 : normal good, income elastic
0 < > 1: normal good, income inelastic
<0: inferior good

Question 15

Cross elasticity of demand

Answer 15

A measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement, ceteris paribus.

Question 16

Cross elasticity of demand formula:

Answer 16

Cross elasticity of demand = % ∆Qd / (% ∆Price of substitute or complement)

Question 17

Cross elasticity ranges:

Answer 17

Positive: prices change in the same direction: substitutes
Negative: prices change in the opposite direction: complements

Question 18

Elasticity of supply

Answer 18

Measures the responsiveness of the quantity supplied to a change in the price of a good, ceteris paribus.

Question 19

Elasticity of supply formula:

Answer 19

Elasticity of supply = % ∆Qs / % ∆P

Question 20

The elasticity of a good depends on:

Answer 20

• Resource substitution possibilities

- Time frame for the supply decision

Question 21

3 distinguished time frames of supply:

Answer 21

• Momentary supply
• Short-run supply
• Long-run supply

Question 22

Momentary supply

Answer 22

The immediate response of the quantity supplied when the price of a good changes.

Question 23

Short-run supply

Answer 23

The response of the quantity supplied to a price change when only some of the possible adjustments to production can be made.

Question 24

Long-run supply

Answer 24

The response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been exploited.