Chapter 6: Elasticity

Question 1

elasticity

Answer 1

a measure of how responsive one variable is to a change in another variable; % change in quantity divided by the % change in price

Question 2

price elasticity of demand = E[d]

Answer 2

a measure of how responsive quantity demanded / a consumer is to a change in price; % change in quantity demanded divided by the % change in price

Question 3

elastic demand

Answer 3

price elasticity of demand greater than 1 in absolute value; quantity demanded that is relatively more responsive to a change in price, such that if price changes by 1%, quantity demanded changes by more than 1% as a result. | E(d )| > 1

Question 4

inelastic demand

Answer 4

price elasticity of demand less than 1 in absolute value; quantity demanded that is relatively less responsive to a change in price, such that if price changes by 1%, quantity demanded changes by less than 1% as a result. | E(d )| < 1

Question 5

unit-elastic demand

Answer 5

price elasticity of demand equal to 1 in absolute value; prices and quantities demanded change by equal percentages, such that if price changes by 1%, quantity changes by 1% as a result | E(d )| = 1

Question 6

perfectly elastic demand

Answer 6

infinite price elasticity of demand; quantity demanded that is so responsive to a change in price that if price increases or decreases, quantity demanded decreases to zero | E(d )| = infinite

Question 7

Is elasticity positive or negative?

Answer 7

negative, because either the numerator or the denominator will be negative; however we take the absolute value to make it easier to work with

Question 8

perfectly inelastic demand

Answer 8

price elasticity of demand to 0; quantity demanded is completely nonresponsive to price changes, such that any increases or decreases in price leave quantity demanded unchanged decreases to zero | E(d )| = 0

Question 9

broad market

Answer 9

inelastic demand (fewer substitutes available)

Question 10

narrow market

Answer 10

elastic demand (more substitutes available)

Question 11

cross-price elasticity of demand

Answer 11

a measure of the effect of a change in the price of one product on the quantity demanded of another; % change in the quantity demanded of one good divided by the % change in the price of another good

Question 12

income elasticity of demand

Answer 12

a measure of how responsive demand is to a change in consumer income; % change in quantity demanded divided by % change in income

Question 13

normal good

Answer 13

a good for which there is a direct relationship between the demand for the good and income; an increase in income increase demand and vice versa; if E(I) positive

Question 14

inferior good

Answer 14

a good for which there is an inverse relationship between the demand for a good and income; an increase in income decreases demand and vice versa; if E(I) negative

Question 15

immediate period

Answer 15

the time period in which producers cannot increase their use of economic resources to increase quantities supplied

Question 16

short run

Answer 16

the time period in which at least one input of production is fixed but other inputs can be changed

Question 17

long run

Answer 17

the time period in which all inputs of production can be changed