Economics

Question 1

Price Elasticity of Demand

Answer 1

-responsiveness of quantity demanded to change in price
- Calculation:
% change in quantity demanded
———————————————–
% change in price

Question 2

Demand is more elastic …

Answer 2

• the better the substitutes for the good
• the greater the proportion of income spent on the good
• in the long run (as more time passes since the price change)

Question 3

Cross Elasticity of Demand

Answer 3

-refers to the responsiveness of the quantity demanded of the good to change in price of another good
-Calculated:
% change quantity demanded
——————————————-
% change price of another good

Question 4

Substitutes

Answer 4

• cross elasticity of demand positive

Question 5

Complements

Answer 5

• cross elasticity of demand negative

Question 6

Income Elasticity of Demand

Answer 6

• sensitivity of quantity demanded to a change in consumer incomes
• Calculated:
  % change quantity demanded
  ——————————————–
  % change income

Question 7

Inferior Goods

Answer 7

• negative income elasticity

Question 8

Normal Goods

Answer 8

• positive income elasticity

Question 9

Types of Normal Goods

Answer 9

1. Necessities: if income elasticity between 0-1

2. Luxuries: if income elasticity greater than 1

Question 10

Price Elasticity of Supply

Answer 10

• responsiveness of quantity supplied to a change in price
• Calculated:
  % change quantity supplied
  —————————————-
  % change in price

1. More elastic in the long run
2. inelastic when resources used to produce are rare or quite limited
3. elastic when it is relatively easy to convert resources to the production of the good

Question 11

Straight Line Demand Curve

Answer 11

1. Demand is more (less) elastic at higher(lower) prices
2. Total revenue is maximized at the price and quantity where demand is unit elastic (price elasticity = -1)
3. When price is in the elastic(inelastic) region of the demand curve, a price increase will decrease(increase) total revenue