Chapter 4 - Elasticity

Question 1

Elasticity

Answer 1

A measure of how much one economic variable, ie. quantity demanded, responds to changes in another economic variable, i.e. price.

Question 2

Price elasticity of demand

Answer 2

The responsiveness of the quantity demanded to a change in price, measured by dividing the % change in the quantity demanded of a product by the % change in the products price.

Question 3

The price elasticity of demand is not the same as the slope of the demand curve

Answer 3

and it is always NEGATIVE

Question 4

Elastic demand

Answer 4

demand is elastic when the % change in quantity demanded is greater than the % change in the price. So the price elasticity is greater than 1 in absolute value.

Question 5

Inelastic demand

Answer 5

Demand is inelastic when the % change in quantity demanded is less than the % change in price, so the price elasticity is less than 1 in absolute value.

Question 6

Unit-elastic demand

Answer 6

Demand is unit-elastic when the % change in quantity demanded is equal to the percentage change in price, so the price elasticity is EQUAL to one in absolute value.

Question 7

Formula Price Elasticity of Demand

Answer 7

Question 8

The midpoint formula

Answer 8

Question 9

Elastic & Inelastic Graphing example

Answer 9

Question 10

Perfectly inelastic demand

Answer 10

Demand is perfectly inelastic when a change in price results in no change in quantity demanded. I.e. Insulin demand (petrol a bit)

Question 11

Perfectly elastic demand

Answer 11

Demand is perfectly elastic when a change in price results in an infinate change in quantity demanded.

Question 12

The determinants of the price elasticity on demand are:

Answer 12

• Availability of substitutes
• The length of time involved
• Luxuries VS Necessities
• Definition of the market
  
  • Share of expenditure on the goods in the consumers budget

Question 13

Total revenue

Answer 13

The total amount of funds received by the seller of a good or service, calculated by multiplying the price per unit by the number of units sold.

I.e. Price per unit x number of units sold

Question 14

If demand is inelastic a price decrease will decrease total revenue.

Answer 14

If it is elastic, a price increase will increase total revenue.

Question 15

Cross price elasticity and revenue

Answer 15

Question 16

Cross price elasticity of demand

Answer 16

The % change in the quantity demanded of one good or service divided by the % change in the price of another good or service.

Question 17

Income elasticity on demand

Answer 17

A measure of the responsiveness of quantity demanded to the changes in income, measured by the % change in quantity demanded by the % change in income

Question 18

If quantity demanded increases with incomes, it is a NORMAL good. If it decreases as incomes increase, it is an INFERIOR good.

Answer 18

If quantity demanded increases over 10% with a 10% income increase it is a luxury good.

Question 19

Price elasticity of supply

Answer 19

The responsiveness of the quantity supplied to a change in the price, measured by dividing the %change in the quantity supplied of a product by the % change in the products price.

Question 20

Determinants of price elasticity of supply

Answer 20

• Length of time involved
• Type of industry
• Availability of inputs.
• Existing capacity
• Inventories held