econChap5

Question 1

What does the price elasticity of demand measure?

Answer 1

It measures how responsive the quantity demanded is to price changes, specifically the percent change in quantity demanded in response to a 1% price change.

Question 2

How is price elasticity of demand calculated?

Answer 2

It is calculated as the percent change in quantity demanded divided by the percent change in price.

Question 3

Why is the price elasticity of demand always negative?

Answer 3

Because price and quantity demanded move in opposite directions as per the law of demand.

Question 4

What is the absolute value of price elasticity of demand?

Answer 4

The magnitude of the price elasticity without considering the negative sign, used to compare the responsiveness of different products.

Question 5

When is demand elastic?

Answer 5

Demand is elastic when the absolute value of price elasticity is greater than 1, meaning quantity demanded changes more than price.

Question 6

What happens to total revenue if demand is elastic and price increases?

Answer 6

Total revenue decreases because the percentage drop in quantity demanded is greater than the percentage increase in price.

Question 7

What does it mean if demand is inelastic?

Answer 7

Demand is inelastic when the absolute value of price elasticity is less than 1, meaning quantity demanded changes less than price.

Question 8

What is unit elasticity of demand?

Answer 8

Unit elasticity occurs when the absolute value of price elasticity is exactly 1, meaning the percentage change in price equals the percentage change in quantity demanded.

Question 9

What does a perfectly inelastic demand curve look like?

Answer 9

A perfectly inelastic demand curve is vertical, meaning the quantity demanded does not change regardless of price changes.

Question 10

What does a perfectly elastic demand curve look like?

Answer 10

A perfectly elastic demand curve is horizontal, meaning any change in price leads to an infinite change in quantity demanded.

Question 11

How does the availability of substitutes affect elasticity?

Answer 11

The more substitutes available, the more elastic the demand because consumers can switch to alternatives when prices rise.

Question 12

How do necessities affect elasticity?

Answer 12

Necessities have inelastic demand because people need to buy them regardless of price.

Question 13

How does time affect price elasticity of demand?

Answer 13

Demand becomes more elastic over time as consumers have more options to adjust their behavior.

Question 14

What is the midpoint formula used for in elasticity calculations?

Answer 14

The midpoint formula is used to calculate percent changes in quantity and price between two points without bias from the starting point.

Question 15

What is the formula for price elasticity of demand using the midpoint formula?

Answer 15

(Percent change in quantity demanded) ÷ (Percent change in price), using the midpoint as the average of the starting and ending values.

Question 16

What is the cross-price elasticity of demand?

Answer 16

It measures the responsiveness of the quantity demanded of one good to a price change in another good.

Question 17

What does a positive cross-price elasticity indicate?

Answer 17

A positive cross-price elasticity indicates that two goods are substitutes, meaning demand for one increases when the price of the other rises.

Question 18

What does a negative cross-price elasticity indicate?

Answer 18

A negative cross-price elasticity indicates that two goods are complements, meaning demand for one decreases when the price of the other rises.

Question 19

What is income elasticity of demand?

Answer 19

It measures how much the quantity demanded of a good changes in response to a change in income.

Question 20

What does a positive income elasticity indicate?

Answer 20

A positive income elasticity indicates that the good is a normal good, meaning demand increases as income increases.

Question 21

What does a negative income elasticity indicate?

Answer 21

A negative income elasticity indicates that the good is an inferior good, meaning demand decreases as income increases.

Question 22

How do businesses use elasticity to set pricing strategies?

Answer 22

Businesses use elasticity to forecast the effects of price changes on revenue. If demand is elastic, lowering prices can increase total revenue; if demand is inelastic, raising prices can increase revenue.

Question 23

How does elasticity affect pricing strategy in competitive markets?

Answer 23

In competitive markets with elastic demand, businesses often follow low-price strategies to attract price-sensitive consumers.

Question 24

What happens to total revenue if demand is inelastic and price increases?

Answer 24

Total revenue increases because the percentage drop in quantity demanded is smaller than the percentage increase in price.

Question 25

Why are ‘sin taxes’ effective at raising revenue?

Answer 25

Sin taxes are effective because the demand for products like cigarettes or alcohol is inelastic, so higher prices don’t significantly reduce quantity demanded.

Question 26

What determines the price elasticity of supply?

Answer 26

The flexibility of sellers to increase or decrease production in response to price changes.

Question 27

What is the formula for price elasticity of supply?

Answer 27

(Percent change in quantity supplied) ÷ (Percent change in price).

Question 28

How does time affect the price elasticity of supply?

Answer 28

Supply becomes more elastic over time as producers have more time to adjust their production capacity.

Question 29

What does a perfectly inelastic supply curve look like?

Answer 29

A perfectly inelastic supply curve is vertical, meaning the quantity supplied does not change regardless of price changes.

Question 30

What does a perfectly elastic supply curve look like?

Answer 30

A perfectly elastic supply curve is horizontal, meaning any change in price leads to an infinite change in quantity supplied.

Question 31

What factors make supply more elastic?

Answer 31

Supply is more elastic when businesses can store inventories, easily access variable inputs, have extra capacity, can easily enter or exit the market, and have more time to adjust to price changes.