Chapter 4 - Elasticity

Question 1

Elasticity

Answer 1

The responsiveness of the quantity demanded of a good to a change in its price

Question 2

Price elasticity of demand definition

Answer 2

A units-free measure 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.

It is units free because elasticity is a RATIO of percentages, so a change in units of price or quantity leaves elasticity value the same

Question 3

Price elasticity of demand formula

Answer 3

Percentage change in quantity demanded / percentage change in the price

(Y2-y1)/average

Regardless whether the price rises or falls, by using the average price and average quantity, we get the same elasticity value

Question 4

The formula for the price elasticity of demand yields a ___ value because ___

Answer 4

Negative ; because price and quantity move in opposite directions. We take the absolute value as such. The magnitude is what tells us how responsive the quantity change has been to a price change.

Question 5

Demands can be (three things)

Answer 5

In elastic
Unit elastic
Or elastic and can range from zero to infinity

Question 6

Perfectly inelastic demand

Answer 6

If the quantity demanded does not change when the price changes, the price elasticity of demand is ZERO and the good is perfectly inelastic

In this case, the demand curve would be a vertical line

Question 7

Unit elastic demand

Answer 7

Percentage change in quantity demanded = percentage change in price.

Price elasticity of demand = 1

Question 8

Inelastic demand

Answer 8

Elasticity of demand is less than 1

If the percentage change in the quantity demanded is smaller than the percentage change in price, then the demand is inelastic.

Question 9

Elastic demand

Answer 9

Elasticity of demand is greater than 1

If the percentage change in the quantity demanded is greater than the percentage change in price, the elasticity of demand is elastic.

Question 10

Perfectly elastic demand

Answer 10

If the percentage change in the quantity demanded is infinitely large when the price barely changes, the price elasticity of demand is INFINITE and therefore the good has a perfectly elastic demand.

All or nothing
If the price decreases —> quantity demanded goes to infinity
If the price increases —> quantity demanded goes to zero

Question 11

What is an example of perfectly inelastic demand

Answer 11

A person needing life-saving drugs (like a person w kidney failure who needs insulin to stay alive), the change in price wont affect their need for the drug because they need it to live.

Graph will have a vertical demand line (y axis is price x axis is quantity demanded)

Question 12

What are factors that affect elasticity of demand

Answer 12

Closeness of substitutes
Proportion of income spent on the good
The time elapsed since a price change

Question 13

How does the closeness of substitutes affect elasticity of demand

Answer 13

It is a factor that influences the elasticity of demand
The closer the substitutes for a good or service, the more elastic is the demand for the good or service
( if there are more substitutes its more elastic)

So necessities like food or housing is inelastic (cuz there are no substitutes)

Luxuries like exotic vacations have elastic demand

Question 14

How does the proportion of income spent on the good affect elasticity of demand

Answer 14

The greater the proportion of income consumers spend on a good, the larger is the elasticity of demand for that good

Question 15

How does the time elapsed since the last price change affect price elasticity of demand

Answer 15

The more time consumers have to adjust to a price change, or the longer a good can be stored without losing its value the more elastic the demand is for that good

Question 16

The total revenue From the sale fo a good or service=

Answer 16

the price of the good multiplied by the quantity sold

Question 17

Income elasticity of demand definition

Answer 17

Measures how the QUANTITY DEMANDED of a good responds to a CHANGE IN INCOME, other things remaining the same.

Question 18

Formula of calculating income elasticity of demand

Answer 18

Percentage change in quantity demanded / percentage change in income

Question 19

When is a demand income elastic

Answer 19

If the INCOME ELASTICITY of demand is greater than 1, demand is income elastic and the good is a NORMAL GOOD

Remember: a normal good is a type of good that experiences an INCREASE IN DEMAND due to an INCREASE IN INCOME.

Question 20

When is a demand income inelastic

Answer 20

If the income elasticity is BETWEEN 0 AND 1, the demand income is inelastic and the good is a normal good

Question 21

When is the income elasticity of demand less than zero

Answer 21

When the good is an inferior good.

Remember: an inferior good is a good whose demand DECREASES when consumer income rises.

Question 22

Cross elasticity of demand definition

Answer 22

Is a measure of the responsiveness of a demand for a good to a change in the price of a substitute or a complement, other things remaining the same.

Remember: two goods are substitutes if the product could be used for the same purpose by the consumers.
Remember: a complementary good is a good whose appeal increases with the popularity of its complement (ex DVD and DVD player)

Question 23

Cross elasticity of demand formula

Answer 23

The percent change in quantity demanded / % change in price of substitute or complement

Question 24

The cross elasticity of demand between that are substitutes are …

Answer 24

Positive

Remember: two goods are substitutes if the product could be used for the same purpose by the consumers.

Question 25

The cross elasticity of demand between goods that are complements are…

Answer 25

Negative

Remember: a complementary good is a good whose appeal increases with the popularity of its complement (ex DVD and DVD player)