Chapter 5 - Elasticity and its Application

Question 1

What is price elasticity of demand?

Answer 1

It measures how much the quantity demanded of a good responds to a change in price. Elastic demand means quantity demanded changes significantly, while inelastic demand means it changes slightly

Question 2

What are some determinants of price elasticity of demand?

Answer 2

Availability of close substitutes

Necessities vs. luxuries

Definition of the market (broad vs. narrow)

Time horizon (elasticity is higher in the long run)

Question 3

What is the relationship between total revenue and elasticity?

Answer 3

For inelastic demand (elasticity < 1), price and total revenue move in the same direction.

For elastic demand (elasticity > 1), price and total revenue move in opposite directions.

For unit elastic demand (elasticity = 1), total revenue remains constant when the price changes​

Question 4

What is income elasticity of demand?

Answer 4

It measures how quantity demanded changes with consumer income. Normal goods have positive income elasticity, while inferior goods have negative​

Question 5

What is cross-price elasticity of demand?

Answer 5

It measures how the quantity demanded of one good changes with the price of another. Positive values indicate substitutes; negative values indicate complements