Chapter 6 - Elasticity

Question 1

What does elasticity imply?

Answer 1

Responsiveness / sensitivity

Question 2

With what is price elasticity of demand concerned?

Answer 2

The sensitivity of the Quantity demanded to a change in the Price of a product

Question 3

In the case of demand curve which is the dependent variable?

Answer 3

The quantity demanded

Question 4

In the case of a demand curve, which is the independent variable?

Answer 4

Price of the product

Question 5

What is price elasticity of demand?

Answer 5

The % change in the quantity demanded if the price of the product changes by 1%, Ceteris paribus

Question 6

Elasticity is calculated by using % changes. Are these changes relative changes or absolute changes?

Answer 6

Relative changes.

Question 7

The price elasticity of demand is the ratio of the % change in the quantity demanded to the % change in price. What is this ratio called?

Answer 7

Elasticity coefficient

Question 8

What does the elasticity coefficient enable us to do?

Answer 8

Compare how consumers react to changes in the price of diff goods & services

Question 9

Perfectly inelastic demand = ?

Answer 9

0

Question 10

Inelastic demand lies between?

Answer 10

0 and 1

Question 11

Unitarily elastic demand = ?

Answer 11

(When the % change in quantity is = to the % change in price)
1

Question 12

Elastic demand = ?

Answer 12

Between 1 and never ending

Question 13

Perfect elastic demand =

Answer 13

Infinity

Question 14

What 10 factors determine the price elasticity of demand?

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Answer 14

1) substitution possibilities
2) degree of complimentary value
3) type of want satisfied
4) time period considered
5) proportion of income spent
6) definition of the product
7) advertising
8) durability
9) number of uses for product
10) addiction

Question 15

Which is the most crucial factor in price elasticity?

Answer 15

The substitutability of the product

Question 16

What are goods with a negative income elasticity called?

Answer 16

Inferior goods

Question 17

When is a good considered to be a luxury item in terms of elasticity?

Answer 17

When the income elasticity of demand is greater than 1

Question 18

What does the income elasticity of demand measure?

Answer 18

The responsiveness of the quantity demanded to changes in income.

Question 19

When is a good considered a essential good?

Answer 19

When the income elasticity of demand is positive but less than 1 or the % change in the quantity demanded is smaller than the % change in income.

Question 20

What does the cross elasticity of demand measure?

Answer 20

The responsiveness of the quantity demanded of a particular good to changes in the price of related goods.

Question 21

What does it mean when there is inelasticity in demand?

Answer 21

Consumers do not care much when prices change.

Question 22

When producers are faced with an inelastic demand for their product should there be incentive to raise or drop prices?

Answer 22

Raise prices. The % fall in quantity demanded would be less that the % increase in the price.

Question 23

What does an elastic demand mean?

Answer 23

Consumers react greater to price changes - more sensitive

Question 24

What should producers do to increase their revenue when faced with an elastic demand to price changes?

Answer 24

Lower their prices.