Chapter 6: Elasticity

Question 1

What is elasticity in economic terms?

Answer 1

Elasticity measures how sensitive one variable is to changes in another variable.

Question 2

What are the main types of elasticity covered in this chapter?

Answer 2

Price elasticity of demand, cross-price elasticity of demand, income elasticity of demand, and price elasticity of supply.

Question 3

How is price elasticity of demand calculated?

Answer 3

It’s calculated as the percentage change in quantity demanded divided by the percentage change in price.

Question 4

Why do economists take the absolute value of price elasticity of demand?

Answer 4

To simplify interpretation, since demand is always negative due to the inverse relationship between price and quantity demanded.

Question 5

What is the midpoint method for calculating percentage changes?

Answer 5

It uses the midpoint (average) of the start and end values in the denominator, providing a consistent result regardless of the starting point.

Question 6

Why is the midpoint method preferred for elasticity calculations?

Answer 6

It avoids inconsistencies in results that occur with the traditional method when the starting point changes.

Question 7

What does it mean if demand is elastic (E > 1)?

Answer 7

Consumers are sensitive to price changes, so a price increase will significantly reduce quantity demanded.

Question 8

What does it mean if demand is inelastic (E < 1)?

Answer 8

Consumers are less sensitive to price changes, and a price increase will cause only a slight reduction in quantity demanded.

Question 9

What is unit elasticity (E = 1)?

Answer 9

Quantity demanded changes proportionally to the change in price, leading to an intermediate demand curve slope.

Question 10

Describe a perfectly inelastic demand curve.

Answer 10

It’s vertical, meaning quantity demanded does not change at all with a change in price (E = 0).

Question 11

Describe a perfectly elastic demand curve.

Answer 11

It’s horizontal, meaning any increase in price results in quantity demanded falling to zero (E = ∞).

Question 12

Does elasticity remain constant along a linear demand curve?

Answer 12

No, elasticity varies along the curve, being elastic at the top and inelastic at the bottom.

Question 13

How does elasticity affect total revenue?

Answer 13

In elastic demand, a price increase decreases revenue; in inelastic demand, a price increase increases revenue.

Question 14

What are the determinants of price elasticity of demand?

Answer 14

vailability of substitutes, necessity vs. luxury, market definition, share of income spent, and time horizon.

Question 15

What is cross-price elasticity of demand?

Answer 15

It measures how the quantity demanded of one good changes in response to a price change in another good.

Question 16

Why is the sign important in cross-price elasticity?

Answer 16

A positive sign indicates substitute goods, while a negative sign indicates complementary goods.

Question 17

How does the concept of time horizon influence demand elasticity?

Answer 17

Demand is generally more elastic in the long run as consumers have more time to find substitutes or alter consumption.

Question 18

What effect does a necessity have on elasticity?

Answer 18

Necessities tend to have inelastic demand, as consumers will continue to buy them even if prices rise.

Question 19

What does price elasticity of supply measure?

Answer 19

It measures how responsive sellers are to price changes.

Question 20

How is price elasticity of supply calculated?

Answer 20

By dividing the percentage change in quantity supplied by the percentage change in price.

Question 21

What is the price elasticity of supply if price rises by 20% and quantity supplied increases by 30%?

Answer 21

The elasticity is 1.5 (30 divided by 20).

Question 22

Why are price elasticity of supply values always positive?

Answer 22

Because of the law of supply, where a price increase leads to an increase in quantity supplied.

Question 23

What method is used to calculate the price elasticity of supply in this textbook?

Answer 23

The midpoint method.

Question 24

What is inelastic supply, and how does it appear on a supply curve?

Answer 24

Inelastic supply (E < 1) means sellers are less sensitive to price changes, resulting in a steep supply curve.

Question 25

What is unit elastic supply?

Answer 25

Unit elastic supply (E = 1) means a price change causes an equal change in quantity supplied, showing an intermediate slope on the supply curve.

Question 26

What characterizes elastic supply on a supply curve?

Answer 26

Elastic supply (E > 1) shows high sensitivity to price changes, leading to a flatter supply curve.

Question 27

What does a perfectly inelastic supply curve look like, and what does it represent?

Answer 27

vertical line, indicating quantity supplied doesn’t change with price changes (e.g., supply of land).

Question 28

Describe perfectly elastic supply.

Answer 28

Perfectly elastic supply (E = ∞) means any price decrease drops quantity supplied to zero, represented by a horizontal line.

Question 29

How does the availability of inputs affect price elasticity of supply?

Answer 29

Easy access to inputs increases elasticity, allowing producers to quickly adjust supply.

Question 30

Why does the time horizon affect price elasticity of supply?

Answer 30

In the long run, sellers are more flexible and can increase supply more easily, raising elasticity.

Question 31

How do elasticity and the supply and demand model work together?

Answer 31

They help analyze economic issues and events that impact the economy.