Chapter 6: Elasticity - Income Elasticity of Demand + Price Elasticity of Supply

Question 1

What is income elasticity of demand?

Answer 1

• percent change in the quantity of a good demanded when a consumer’s income changes, divided by the percent change in the consumer’s income
  basically how sensitive is demand to income changes

Question 2

Income Elasticity of demand Formula

Answer 2

Question 3

How does IED determine if a good is normal or inferior?

Answer 3

normal - positive
inferior - negative

Question 4

How does IED determine if a good is a luxury or necessity?

Answer 4

Normal and less than 1 = necessity
Normal and Greater than 1 = luxury
sign is important!

Question 5

How does inferior goods correlate to IED?

Answer 5

• the quantity demanded at any given price decreases as income decreases

Question 6

Why is IED important

Answer 6

• Predicting sales through the business cycle
  ie. are u selling a necessity/luxury?
• urban planning

Question 7

What is Price elasticity of supply?

Answer 7

• measure of the responsiveness of the quantity of a good supplied to the price of that good

Question 8

What is price elasticity of supply equal to?

Answer 8

• ratio of the percent change in the quantity supplied to the percent change in the price as we move along the SUPPLY curve

Question 9

When is there a perfectly inelastic supply? (3)

Answer 9

• when the price elasticity of supply is zero
• so that changes in the price of the good have no effect on the quantity supplied
• vertical line

Question 10

When is there a perfectly elastic supply? (2)

Answer 10

• when even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that price elasticity of supply is infinite
• horizontal line

Question 11

What factors determine price elasticity of supply? (2)

Answer 11

• The availability of outputs
• time

Question 12

Why does the availability of inputs determine Price elasticity of supply? (2)

Answer 12

• PES tends to be large when inputs are readily available and can be shifted into and out of production at a relatively low cost
• tends to be small when inputs are difficult to obtain

Question 13

How does time affect price elasticity of supply? (2)

Answer 13

• PES tends to grow larger as producers have more time to respond to a price change
• this means that the long run price elasticity of a supply is often higher than short-run

Question 14

If the supply curve goes through the origin, what does that say about price elasticity of supply?

Answer 14

• constant and = 1
  note that we skipped over “moving through the line”