Chapter 6 - Elasticity

Question 1

Price Elasticity of Demand

Answer 1

The ratio of percent change in quantity demanded over the percent change in price

Question 2

Elastic

Answer 2

Consumers change quantity demanded by a lot in response to price

Question 3

Inelastic

Answer 3

Consumers do not change quantity demanded as much when price changes
-allows for greater profits by raising price

Question 4

Midpoint Method

Answer 4

Calculates changes in variable compared with the average (midpoint) of the starting and final values.
-calculate midpoint twice, once for change in quantity demanded and once for change in the price of good.

Question 5

Perfectly Inelastic Demand

Answer 5

when elasticity = 0, a vertical line on the graph

-represents no change in quantity demanded das price rises or falls

Question 6

Perfectly Elastic Demand

Answer 6

when any price increase will cause quantity demanded to drop to 0, a horizontal line on a graph.

Question 7

Rule of Thumb

Answer 7

elastic > 1, inelastic < 1, unit-elastic = 1

Question 8

Total Revenue

Answer 8

price * quantity sold

Question 9

Price Effect

Answer 9

After a price increase, each unit sold sells at a higher price, tends to raise revenue in INELASTIC case

Question 10

Quantity Effect

Answer 10

After a price increase, fewer units are sold, tends to lower revenue, apparent in an ELASTIC case

Question 11

Unit-Elastic (price/quantity effect)

Answer 11

An increase or decrease in price does not change total revenue

Question 12

Inelastic (price/quantity effect)

Answer 12

Higher price increases total revenue, price effect > quantity effect. When price is lowered it reduces total revenue

Question 13

Elastic (price/quantity effect)

Answer 13

An increase in price reduces total revenue, quantity effect > price effect. When price is lowered it increases total revenue

Question 14

What Factors Determine the Price Elasticity of Demand

Answer 14

1) Is good necessity of luxury? (lower for necessities, higher for luxuries)
2) Availability of substitutes? (lower if no subs for that good)
3) share of income spent on good? (when good takes up a good share of income, good is more elastic)
4) time elapsed since price change (increases as consumers have more time to adjust, long term < short term)

Question 15

Cross-Price Elasticity of Demand

Answer 15

Measures effect of change in one good’s price on the quantity demanded of the other price, (percent change in Qd of good A over percent change in price of good B

• when goods are subs, this value is (+)
• when goods are complements this value is (-)

Question 16

Income Elasticity of Demand

Answer 16

The percent change in quantity demanded of a good when consumer’s income changes divided by percent change income.

• (+) when good is normal good, Qd increase as income increases
• (-) when good is an inferior good, Qd decreases as the income increases

Question 17

Price Elasticity of Supply

Answer 17

The measure of the responsiveness of quantity supplied to the price of the good, (percent change in Qs divided by the percent change in price)

Question 18

Perfectly Inelastic Supply

Answer 18

changes in price have no effect on quantity supplied

Question 19

Perfectly Elastic

Answer 19

tiny increases/decreases in price will lead to large changes in quantity supplied

Question 20

Perfect Scenarios in Supply

Answer 20

Are easier to find in life compared to demand.

Question 21

What Factors Determine Price Elasticity of Supply?

Answer 21

1) Availability of Inputs (larger when inputs are available, smaller when inputs are harder to obtain)
2) Time (tends to grow as producers have more time to respond to price change, long run>short run