Chapter 4: Elasticity

Question 1

What is price elasticity of demand?

Answer 1

a units-free measurement of the responsiveness of the quantity demanded of a good to a change in price.

Question 2

For demand: when a good/service is sensitive (consumers are willing to pay anything for this good) to a change in price, what does that mean? Give an example of a sensitive good.

Answer 2

it means that the good/service is inelastic.

an example of this is a necessity (medicine)

Question 3

For demand: when a good/service is not sensitive to a change in price, what does that mean? Give an example of a non-sensitive good.

Answer 3

it means that the good/service is elastic. If the price changes a little bit, consumers are not going to want to buy the good anymore.
An example of this would be when 2 side-by-side vending machines have the same products.

Question 4

What is the equation for the price elasticity of demand?

Answer 4

e=|(delta Q / ave. Q) / (delta P / ave. P)|

Question 5

What does a perfectly inelastic curve look like? What values would of price elasticity of demand would be considered perfectly inelastic?

Answer 5

A horizontal line.

= infinity

Question 6

What does a perfectly elastic curve look like? What values would of price elasticity of demand would be considered perfectly elastic?

Answer 6

A vertical line

= 0

Question 7

What does an inelastic curve look like? What values would of price elasticity of demand would be considered inelastic?

Answer 7

A steep sloping downward line.

=1

Question 8

What does a elastic curve look like? What values would of price elasticity of demand would be considered elastic?

Answer 8

A gradual sloping downward line.

=e>1

Question 9

What are the factors that influence elasticity of demand?

Answer 9

• Closeness of substitutes
• Proportion of income
• Time elapsed

Question 10

How does closeness of substitutes influence elasticity of demand?

Answer 10

the closer the substitutes for the good, the more elastic it is.

Question 11

How does proportion of income influence elasticity of demand?

Answer 11

the greater the proportion of income people spend on a good, the more elastic they will be to the price (ex. paying rent)
if they spend an insignificant proportion of their income on a good, they will be inelastic to the changing of the price (ex. package of gum)

Question 12

How does time elapsed influence elasticity of demand?

Answer 12

the more time the good is available, the more elastic it is.

Question 13

How do you calculate total revenue?

Answer 13

TR=price x quantity sold

Question 14

how are TR and price elasticity of demand related?

Answer 14

The change in total revenue depends on the elasticity of demand of the good

Question 15

When the demand is elastic, what happens to the TR?

Answer 15

TR increases, so firms should decrease their price

Question 16

When the demand is inelastic, what happens to the TR?

Answer 16

TR decreases, so firms should increase their price.

Question 17

When the demand is unit elastic, what happens to the TR?

Answer 17

TR remains the same. Any change in price = change in quantity demanded.

Question 18

What is the total revenue test?

Answer 18

It is a method of estimating the price elasticity of demand by observing the change in total revenue.

Question 19

What is income elasticity of demand?

Answer 19

It’s a method of the responsiveness of the demand for a good relative to a change in income.

Question 20

How is the income elasticity of demand calculated?

Answer 20

e = (delta Q / ave. Q) / (delta M / ave. M)

where m = income

Question 21

If income is e>1, what does that mean? Is the good an inferior good or normal good?

Answer 21

This means that the income is elastic, and that it is a normal good.

Question 22

If income is 0

Answer 22

This means that the income is inelastic, and that it is a normal good.

Question 23

If income is e<0, what does that mean? Is the good an inferior good or normal good?

Answer 23

This means that income is an inferior good.

Question 24

What is an inferior good?

Answer 24

When income increases, quantity demanded for the good decreases.

Question 25

What is a normal good?

Answer 25

When income increases, quantity demanded for the good increases.

Question 26

What is cross elasticity of demand?

Answer 26

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

Question 27

How do you measure cross elasticity of demand?

Answer 27

ce = (delta Q / av. Q ) / (delta P / av. P )
Q = quantity demanded of good A
P = price of good B

Question 28

If the cross elasticity of demand is positive, what does that mean?

Answer 28

it means that the Q and P change in the same direction - substitutes.

Question 29

If the cross elasticity of demand is negative, what does that mean?

Answer 29

it means that the Q and P change in the opposite direction - complements.

Question 30

What is elasticity of supply?

Answer 30

measures the responsiveness of the quantity supplied to a change in the price of a good.

Question 31

How do you calculate elasticity of supply?

Answer 31

e = (delta Q / av. Q ) / (delta P / av. P )

Question 32

For elasticity of supply, what does it mean if e>1?

Answer 32

it means that the supply is elastic

Question 33

For elasticity of supply, what does it mean if 0

Answer 33

supply is inelastic

Question 34

For elasticity of supply, what does it mean if e = 1?

Answer 34

it means that supply is unit elastic.

Question 35

What are the factors that affect elasticity of supply?

Answer 35

• Resource substititution

- Time frame

Question 36

How does resource substitution influence elasticity of supply?

Answer 36

if it is hard to find substitutes, then supply is inelastic.
easy = elastic

Question 37

How does time frame influence elasticity of supply?

Answer 37

the longer it is available, the more elastic it is.

Question 38

If a good can be made/sold quickly, is it inelastic or elastic?

Answer 38

elastic.