Chapter 6: Elasticity

Question 1

What is elasticity of demand?

Answer 1

the responsiveness (or sensitivity) of consumers to a price change

Question 1

What is the formula for Ed

Answer 1

(percentage change in quantity demanded)/(percentage change in price)

Question 2

What is percentage change defined as?

Answer 2

(change in value)/(original value)

Question 3

How do u use the midpoint formula to calculate elasticity?

Answer 3

(change in quantity/sum of quantities/2)/(change in price/sum of prices/2)

Question 4

What is elastic demand?

Answer 4

Demand is elastic if a specific percentage change in price results in a larger change in quantity demanded. In such cases, Ed is greater than 1

Question 5

What is inelastic demand?

Answer 5

if a specific percentage change in price produces a smaller percentage change in quantity demanded, demand is inelastic. In such cases, Ed is less than 1.

Question 6

What is unity elasticity?

Answer 6

the case separating elastic and inelastic demand occurs when a percentage change in price and the resulting percentage change in quantity demanded are the same. This special case is termed unit elasticity because Ed is exactly 1 or unity.

Question 7

When is demand perfectly inelastic?

Answer 7

When a price change results in no change whatsoever in the quantity demanded, economists say that demand is perfectly inelastic. The price elastic coefficient is zero because there is no response to a change in price.

Question 8

When is demand perfectly elastic?

Answer 8

Where a small price reduction causes buyers to increase their purchases from zero to all they can obtain, the elasticity coefficient is infinite and economists say that demand is perfectly elastic

Question 9

What is Total Revenue (TR) and how do you calculate it?

Answer 9

the total amount the seller receives from the sale of a product in a particular time period; it is calculated by multiplying the product price (P) by the quantity sold (Q)

Question 10

When is demand elastic according to the total-revenue test?

Answer 10

If total revenue changes in the opposite direction from price

Question 11

When is demand inelastic according to the total-revenue test?

Answer 11

if total revenue changes in the same direction of price

Question 12

When is demand unit-elastic according to the total-revenue test?

Answer 12

if total revenue does not change when price changes

Question 13

What effect will a decrease in price have if demand is elastic?

Answer 13

increase total revenue

Question 14

What effect will an increase in price have if demand is elastic?

Answer 14

reduce total revenue

Question 15

What effect will a decrease in price have if demand is inelastic?

Answer 15

reduce total revenue

Question 16

What effect will an increase in price have if demand is inelastic?

Answer 16

increase total revenue

Question 17

What is sustainability?

Answer 17

generally, the larger the number of substitute goods that are available, the greater the price elasticity of demand

Question 18

What is proportion of income?

Answer 18

ceteris paribus, the higher the price of a good relative to consumer’s income, the greater the price elasticity of demand

Question 19

What is luxuries versus necessities?

Answer 19

In general, the more that a good is considered to be a “luxury” rather than a “necessity”, the greater is the price elasticity of demand

Question 20

What is time?

Answer 20

generally, product demand is more elastic the longer the time period under consideration

Question 21

How do you calculate the supply elasticity coefficient?

Answer 21

(percentage change in quantity supplied)/(percentage change in price)

Question 22

What does the degree of price elasticity of supply depend on?

Answer 22

how easily– and therefore quickly– producers can shift resources between alternative uses

Question 23

What is the immediate market period?

Answer 23

the length of time over which producers are unable to respond to a change in price with a change in quantity supplied

Question 24

What is the short run?

Answer 24

a period of time too short to change plat capacity but long enough to use the fixed-size plant more or less intensively

Question 25

What is the long run?

Answer 25

a time period long enough for firms to adjust their plant sizes for new firms to enter (or existing firms to leave) the industry

Question 26

What is the total-revenue-test for elasticity of supply?

Answer 26

Trick question - there is none

Question 27

What does cross elasticity of demand measure?

Answer 27

how sensitive consumer purchases of one product are to a change in the price of some other product

Question 28

How do you calculate the cross elasticity of demand coefficient?

Answer 28

(percentage change in quantity demanded of Product X)/(percentage change in price of product Y)

Question 29

What are substitute goods?

Answer 29

if cross elasticity of demand is positive, meaning that sales of X move In the same direction as a change in the price of Y, then X and Y are substitute goods

Question 30

What are complementary goods?

Answer 30

when cross elasticity is negative, we know that X and Y “go together”; an increase in the price of one decreases the demand for the other. So the two are complementary foods.

Question 31

What are independent goods?

Answer 31

a zero or near-zero cross elasticity suggests that the two products being considered are unrelated or independent goods

Question 32

What does income elasticity of demand measure?

Answer 32

the degree to which consumers respond to a change in their incomes by buying more or less of a particular good

Question 33

How do you calculate the income elasticity of demand coefficient?

Answer 33

(percentage change in quantity demanded)/(percentage change in income)

Question 34

What are normal goods?

Answer 34

for most goods, the income-elasticity coefficient Ei is positive, meaning that more of them are demanded as incomes rise. Such goods are called normal or superior goods.

Question 35

What are inferior goods?

Answer 35

a negative income-elasticity coefficient designates an inferior good