Chapter 5 - Elasticity

Question 1

Elasticity

Answer 1

Measures responsiveness of one variable to changes in another variable

Question 2

Price elasticity

Answer 2

Ratio between the % change in quantity demanded or supplied and the % change in price

Question 3

Price elasticity of demand

Answer 3

% change in demand divided by % change in price (always negative)

Question 4

Price elasticity of supply

Answer 4

% change in supply divided by % change in price

Question 5

Elastic

Answer 5

Elasticity > 1

Question 6

Inelastic

Answer 6

Elasticity < 1

Question 7

Unitary

Answer 7

Elasticity = 1 (extreme cases only)

Question 8

Midpoint method

Answer 8

Used to calculate elasticity, obtains same elasticity between to price points whether there is a decrease or increase in price (uses same base for both cases)

Question 9

Midpoint method equation

Answer 9

% change in quantity = Q1—Q2 / (Q1+Q2)/2 x 100

% change in price= P1—P2 / (P1+P2)/2 x 100

Question 10

Infinite/perfect elasticity

Answer 10

Quantity demanded or supplied changes by an infinite amount in response to any change in price, supply and demand curve are horizontal, only in extreme cases

Question 11

Zero elasticity

Answer 11

% change in any price results in no change to quantity, only in extreme cases, supply and demand curve vertical

Question 12

Constant unitary elasticity

Answer 12

Price change of 1% results in quantity change of 1% (demand curve is a curved line, supply curve is a straight line)

Question 13

Are necessities inelastic or elastic? Non-necessities?

Answer 13

Necessities are inelastic, non-necessities are more price-sensitive

Question 14

Tax incidence

Answer 14

How the burden of tax is divided between consumers and producers

Question 15

Who bears the burden of taxes? Consumers or producers?

Answer 15

1. If demand is more inelastic than supply, consumers get most of the tax burden (demand remains relatively similar with price change)
2. If supply is more inelastic than demand, sellers get most of the tax burden (sellers have to accept lower prices for their business)

Question 16

Income elasticity of demand

Answer 16

% change in Qd / % change in income (typically positive; rise in income causes increase in Qd)

Question 17

Normal goods

Answer 17

Income elasticity of demand is positive

Question 18

Inferior goods

Answer 18

Income elasticity of demand is negative

Question 19

Cross-price elasticity of demand

Answer 19

The price of one good is affecting the Qd of a different good

Question 20

Cross-price elasticity of demand equation

Answer 20

% change in Qd of good A divided by % change in price of good B

Question 21

Wage elasticity of labour supply equation

Answer 21

% change in quantity of labour supplied divided by % change in wage

Question 22

Wage elasticity of labour demand equation

Answer 22

% change in quantity of labour demanded divided by % change in wage

Question 23

Elasticity of savings equation

Answer 23

% change in quantity of financial savings / % change in wage

Question 24

Interest rate elasticity of savings equation

Answer 24

% change in quantity of savings / % change in interest rate

Question 25

Interest rate elasticity of borrowing equation

Answer 25

% change in quantity of borrowing / % change in interest rate