Chapter 4- Elasticity

Question 1

Price elasticity of demand calculations

Answer 1

Calculated with percentage change

% change in quantity demanded
———————————————
% change in price

Percetnage change
= delta P or Qd / average P or Qd

Question 2

What doesnt serve us well when comparing different products?

Answer 2

The slope of the demand curve

Question 3

Whats important to consider regarding pricing decision?

What is elasticity all about

Answer 3

The responsiveness of the market (Qd or Qs)

Question 4

Elasiticity decreases when:

Answer 4

Going from high prices to low prices

Question 5

How will the elasticity be for a demand curve thats almost horizontal

Answer 5

Elasticity will be high because any price change will cause large amount of changes in quantity demanded

Question 6

What is unit elasticity

Answer 6

If demand curve value is exactly 1 or -1

Its the equilibrium point with supply curve

Question 7

It the demand curve, when is it considered to be elastic?

Answer 7

When it is above unit elasticity

Has to be higher that 1 or n - 1 in demand curve

At high values, it is elastic

At price change, the quantity demanded change makes a lot of a difference in revenues

Question 8

In demand curve, when is it considered to be inelastic?

Answer 8

When the value lies between unity and 0

If prices low, usually inelastic

Price change makes almost no difference in revenue generated by quantity demanded change

Question 9

What does it mean when economists say that demand has high or low elasticity

Answer 9

It means that at a given price, the elasticity has high or low value

Question 10

How is the elasticity of basic needs

Answer 10

Elasticity is basically inexistent

Ex: food

Question 11

On the demand curve, when is there max expenditure

Answer 11

At midpoint

If you sell at price too high, not much quantity demanded, so lower price so that more quantity demanded

At one point, if too low, yes there would be a lot of quantity demanded but not enough money generated, so up prices

Question 12

Is price elasticity of demand frequently lower in the short run or long run?

Answer 12

Short run boyyy

Consumers cant adapt

Question 13

What is price elasticity of demand

Answer 13

Tells us about consumer responses to price changes in different regions of the demand curve holding all the other exterior variables constant

Question 14

Cross price elasticity of demand

Answer 14

Percentage change in quantity demanded of a product
/
Percentage change in the price of another

Can be positive or negative

Question 15

Income elasticity of demand

Answer 15

Percentage change quantity demanded
/
Percentage change in income

Can be positive or negative

Question 16

Is elasticity of inferior good positive or negative

Answer 16

Negative

Decrease in demand

Question 17

Midpoint of demand

Answer 17

The average point in demand curve

Unit elasticity at this point

Question 18

Elasticity value at intercept

Answer 18

Élasticité at P=0 is -infinity (in demand)

Élasticité at Qd=0 is 0 (in demand)

Question 19

Unit elasticity

Answer 19

When elasticity is either 1 or -1

At midpoint

Above it is high elasticity

Below it is is low elasticity

Question 20

Fixed Qd

Vertical demand curve

Answer 20

No elasticity

Any change in price would have 0 effect on elasticity of Qd

Quantity demanded wont change

Question 21

Fixed price

Horizontal demand

Answer 21

Infinite elasticity

Quantity supplied can change infinitely without the price changing

Question 22

Basic necessities are most likely do me elastic or inelastic in demand?

Answer 22

Inelastic

People wont have a choice even if price change demand and Qd wont

Question 23

Elasticity of luxury good

Answer 23

Exceed or is equal to unity

Question 24

Elasticity of necessity

Answer 24

Between 0 and unity

Question 25

If a good or brand can be easily substituted? Elastic or inelastic? If all related goods change prices? Elastic or inelastic?

Answer 25

Elastic Inelastic In

Question 25

What happens if theres a supply shock on an elastic demand

Answer 25

Will have small effect on price Will have large effect on quantity demanded

Question 25

What happens when theres a supply shock on inelastic demand

Answer 25

Large impact on price Low impact on quantity demanded

Question 26

Formula for total revenue

Answer 26

P x Q

Question 27

What happens if price falls on elastic demand

Answer 27

Revenue from new sales will exceed fall in revenue from existing sales Total revenue will rise

Question 28

Hat happens if price falls on inelastic demand

Answer 28

Revenue from new sales will be less than the fall in revenue from existing sales Total revenue will fall

Question 29

Is price elasticity of demand frequently higher in the short run or long run?

Answer 29

Long run Consumers have time to adapt

Question 30

If two goods are substitutes, is the cross price positive or negative?

Answer 30

Positive Cause if price of one goes up, so will demand of the other and vice versa so in calculation, it remains positive

Question 31

If two goods are comp,ements, is the cross price positive or negative?

Answer 31

Negative Cause of price of one goes up, Quantity demanded of other goes down, hence in calculation it is negative

Question 32

Is cross price policy important in public social policy as well as startegic commercial policy?

Answer 32

Yeee boy Example illegal and legal strong substitutes High cross price elasticity of demand

Question 33

Do inflation rates affect price elasticity of demand?

Answer 33

When computing price elasticity of demand for one good we use price change of that good relative to the inflation rate

Question 34

Elasticity of supply

Answer 34

Responsiveness of quantity supplied to a change in price Same calculation as demand elasticity

Question 35

What does it mean when supply curve is vertical or almost vertical

Answer 35

Supply elasticity is almost non existent when almost vertical When vertical no elasticity Change in prices = almost no changes in Quantity supplied

Question 36

When supply curve horizontal

Answer 36

Elasticity is infinite

Question 37

Types of taxes

Answer 37

Specific tax (fixed dollar levy per unit sold) Ad valorem type (percentage levy)

Question 38

tax incidence

Answer 38

how tax burden is shared by buyers and sellers increase or decrease if tax changes the price have to examine net effect of tax on equilibrium price

Question 39

tax supply with elastic supply

Answer 39

the more elastic the supply is, the more incidence on the buyer tax causes supply to shift price to buyer increases price to supplier declines

Question 40

elasticities using slope of supply or demand curve

Answer 40

Ed = Delta Q / Q first term now the slop (or inverse of slope) of demand curve formulation permits computation of elasticity value at a point on demand curve (for imperceptibly small change in price) arc formula would not permit this if demand curve is straight line, slope is constant elasticity value is the product of this slope and ration of price and quantity coordinates