CHAPTER 5: Elasticity and Its Application

Question 1

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Answer 1

elasticity

Question 2

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

Answer 2

price elasticity of demand

Question 3

Goods tend to have more elastic demand because it is easier for consumers to switch from that good to others. For example, butter and margarine are easily substitutable

Answer 3

Availability of Close Substitutes

Question 4

______ tend to have inelastic demands, whereas ______ have elastic demands. When the price of a doctor’s visit rises, people will not dramatically reduce the number of times they go to the doctor, a­lthough they might go somewhat less often. By contrast, when the price of sailboats rises, the quantity of sailboats demanded falls substantially. The reason is that most people view doctor visits as a ____ and sailboats as a _____

Answer 4

necessities versus luxury

Question 5

Price Elasticity of Demand formula

Answer 5

Price elasticity of demand =
Percentage change in quantity demanded / Percentage change in price

Question 6

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold

Answer 6

total revenue

Question 7

formula for total revenue

Answer 7

P x Q

Question 8

a measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income

Answer 8

income elasticity of demand

Question 9

formula for income elasticity of demand

Answer 9

income elasticity of demand = percentage change in quantity demanded / percentage change in income

Question 10

Higher income raises the quantity demanded. Because quantity demanded and income move in the same direction, normal goods have positive income elasticities

Answer 10

normal goods

Question 11

higher income lowers the quantity demanded. because quantity demanded. Because quantity demanded and income move in opposite directions, it have negative income elasticities.

Answer 11

inferior goods

Question 12

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good

Answer 12

cross-price elasticity of demand

Question 13

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Answer 13

price elasticity of supply

Question 14

formula for price elasticity of supply

Answer 14

price elasticity of supply = percentage in quantity supplied/percentage change in price

Question 15

if the quantity demanded responds only slightly to changes in the price

Answer 15

inelastic

Question 16

determinants (4)

Answer 16

1. availability of close substitutes
2. necessities versus luxuries
3. definition of the Market
4. time horizon

Question 17

Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods.

Answer 17

definition of the market

Question 18

Goods tend to have more
elastic demand over longer _____

Answer 18

time horizon