Chapter 4: Elasticity of Demand

Question 1

Price elastic

Answer 1

A modest price change can cause a substantial change in quantity

Question 2

Price inelastic

Answer 2

A substantial price change can cause only a modest change in quantity

Question 3

Formula 1 for Price elasticity of demand

Answer 3

% change in quantity demanded of X/ % change in price of X

Question 4

Formula 2 for Price elasticity of demand

Answer 4

(change in quant. demanded of x/ orig quant. demanded of x)/ (change in price of X/orig price of X)

Question 5

When is demand elastic based on Ed?

Answer 5

absolute value of Ed will be greater than 1

Question 6

When is demand inelastic based on Ed?

Answer 6

absolute value of Ed will be less than 1

Question 7

When is demand unit elastic based on Ed?

Answer 7

absolute value of Ed is exactly 1

Question 8

Perfectly inelastic demand

Answer 8

A price change results in no change in the quantity demanded (demand curve is a vertical line)

Question 9

Perfectly elastic demand

Answer 9

At the ongoing market price, the firm is able to sell whatever the quantity it wishes to sell (horizontal demand curve)

Question 10

Total-revenue test (elastic)

Answer 10

a decrease in price causes an increase in the total revenue

Question 11

Total-revenue test (inelastic)

Answer 11

a decrease in price causes a decrease in the total revenue

Question 12

Total-revenue test (unit elasticity)

Answer 12

a decrease in price leaves total revenues unchanged

Question 13

4 determinants of price elasticity of demand

Answer 13

1) Substitutability
2) Proportion of income
3) Luxuries vs. Necessities
4) Time

Question 14

Substitutability in terms of price elasticity of demand

Answer 14

The larger the number of substitute gods that are available the greater the price elasticity of demand

Question 15

Proportion of income in terms of price elasticity of demand

Answer 15

The higher the price of a product relative to one’s income, the greater the price elasticity of demand for it (demands for big ticket items tend to be more price elastic

Question 16

Luxuries vs Necessities in terms of price elasticity of demand

Answer 16

The demand for “luxurious goods” tends to be more elastic than the demand for “necessities)

Question 17

Time in terms of price elasticity of demand

Answer 17

The demand for a product is more elastic the longer the time period under consideration

Question 18

Habit formation

Answer 18

Consumers may not immediately reduce their purchases very much when the price of the beef rises by 10%, but in time they may shift to chicken, pork or fish

Question 19

Product Durability:

Answer 19

Short-run demand for gasoline is more inelastic than its long-run demand. In the short-run people are stuck with their present cars but with rising gasoline prices, they will eventually replace them with more fuel efficient choices

Question 20

The Law of Supply

Answer 20

Producers will supply more of a product when its price rises and vice versa

Question 21

Price elasticity of Supply

Answer 21

Measures the responsiveness of the quantity supplied by the producers when the product price changes

Question 22

Elastic supply

Answer 22

modest price changes cause substantial changes in quantity

Question 23

Inelastic supply

Answer 23

Substantial price changes cause only modest changes in quantity

Question 24

Formula for price elasticity of supply

Answer 24

Es= % change in Q supplied of x/% change in P of X

Question 25

Elastic supply in terms of Es

Answer 25

Es > 1

Question 26

Unit elastic supply in terms of Es

Answer 26

Es = 1

Question 27

Inelastic supply in terms of Es

Answer 27

Es < 1

Question 28

Factors affecting price elasticity of supply

Answer 28

Availability of inputs
Availability of substitutes
Transferable inputs
Time frame

Question 29

Transferability of the inputs

Answer 29

If inputs can be easily transported from one production site to another an increase in the price of a product in one market will motivate producers in that market to transfer inputs from other markets

Question 30

Time

Answer 30

The longer the time frame, the greater the quantity response and hence the smaller price change

Question 31

If there is no time for producers to adjust to a price change, the supply is ________

Answer 31

perfectly inelastic

Question 32

The short-run

Answer 32

enough time to adjust output by changing the variable inputs but not the fixed inputs

Question 33

Formula for cross-elasticity of demand

Answer 33

Exy = % change in quantity demanded of X/ % change in P of Y

Question 34

Formula for cross elasticity of demand (using avg)

Answer 34

Ex,y= (change in quantity demanded of X/ sum of new and old demand quantities/2)/ (change in P of Y/ sum of new and old P of Y/2

Question 35

X and Y are substitute goods when

Answer 35

Ex,y > 0

Question 36

X and Y are independent goods when

Answer 36

Ex,y=0

Question 37

X and Y are complementary goods when

Answer 37

Ex,y < 0

Question 38

Formula 1 for income elasticity of demand

Answer 38

EI= % change in quantity demanded of the good/ % change in income

Question 39

Formula 2 for income elasticity of demand

Answer 39

EI= (change in Q demanded of X/ sum of new and old demand quant/2) / (change in income/ sum of new and old incomes/2)

Question 40

Normal good

Answer 40

Demand increases when incomes increases and vice versa

Question 41

Inferior good

Answer 41

Demand increases when income decreases and vice versa

Question 42

Which consumer product suffer the greatest demand decreases during recession?

Answer 42

Automobiles and housing (high income elasticity coefficients)