Chapter 5- Elasticity and Its Application

Question 1

Elasticity

Answer 1

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

Question 2

Price of Elasticity of Demand

Answer 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

Question 3

Price of Elasticity of Demand simplified..

Answer 3

how much the quantity demanded responds to a change in price

Question 4

Elastic

Answer 4

if the quantity demanded responds substantially to changes in the price

Question 5

Inelastic

Answer 5

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

Question 6

Substitutes tend to have….

Answer 6

Goods with close substitutes tend to have more elastic demand

Question 7

Necessities tend to have…

Answer 7

inelastic demands,

Question 8

Luxuries tend to have….

Answer 8

elastic demands

Question 9

Narrowly defined markets tend to have….

Answer 9

more elastic demand than broadly defined markets

Question 10

Time Horizons

Answer 10

Goods tend to have more elastic demand over longer time horizons

Question 11

Price elasticity of demand =

Answer 11

Percentage change in price

Question 12

For example, a 10% increase in price, 20% decrease,

Calculate Elasticity of Demand

Answer 12

20%
= ——— = 2
10%

Question 13

Midpoint method

Answer 13

computes a percentage change by dividing the change by midpoint (or average) of the initial and final levels

Question 14

Midpoint method is often used when calculating….

Answer 14

the price elasticity of demand between two points

Question 15

Price elasticity of demand=

(between two points; defined as Q1, P1, & Q2, P2

Answer 15

(Q2-Q1) / ((Q2+Q1) / 2)
= ————————————
(P2-P1) / ((P2+P1) / 2)

Question 16

Demand is considered elastic if it is…

Answer 16

Greater than 1

Question 17

Demand is considered inelastic if it…

Answer 17

Is less than 1

Question 18

Demand is considered unit elastic if it….

Answer 18

Equals exactly 1

Question 19

Total Renevue

Answer 19

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

Question 20

Total Revenue Formula

Answer 20

P*Q

Question 21

At points with a low price and high quantity the demand curve is….

Answer 21

Inelastic

Question 22

At points with a high price and low quantity the demand curve is….

Answer 22

Elastic

Question 23

Income Elasticity of Demand

Answer 23

measures how the quantity demanded changes as consumer income changes

Question 24

Income Elasticity of Demand Formula

Answer 24

Percentage change in quantity demanded
= ——————————————————————–
Percentage change in income

Question 25

Cross-Price Elasticity of Demand

Answer 25

a measure of how much the quantity demanded of one good responds to a change in the price of another good,

Question 26

Cross-Price Elasticity of Demand Formula

Answer 26

Percentage change in quantity demanded of good 1
= ——————————————————————————-
Percentage change in the price of good 2

Question 27

Price Elasticity of Supply

Answer 27

measures how much the quantity supplied responds to change in prices

Question 28

Supply of a good is said to be elastic if…

Answer 28

the quantity supplied responds substantially to changes in the price

Question 29

Supply is said to be inelastic if…

Answer 29

the quantity supplied responds only slightly to changes in price

Question 30

Price Elasticity of Supply Formula

Answer 30

Percentage change in quantity supplied
= ————————————————————–
Percentage change in price

Question 31

Perfectly Inelastic when…

Answer 31

the supply curve is vertical

Question 32

Perfectly Elastic when…

Answer 32

the supply curve becomes horozontial

Question 33

Very small changes in the price lead to very large changes in the….

Answer 33

quantity supplied

Question 34

For low levels of quantity supplied, the elasticity of supply is…

Answer 34

High