Elasticities of demand and supply Key terms

Question 1

The price elasticity of demand (PED)

Answer 1

is the percentage change in the quantity demanded divided by the corresponding percentage change in its price PED = (% change in quantity)/(% change in price)

Question 2

Demand is elastic if..

Answer 2

the price elasticity is more negative than –1.

Question 3

Demand is inelastic if..

Answer 3

the price elasticity lies between –1 and 0.

Question 4

If the demand elasticity is exactly –1..

Answer 4

demand is unit elastic

Question 5

The fallacy of composition

Answer 5

means that what is true for the individual may not be true for everyone together, and what is true for everyone together may not hold for the individual.

Question 6

The short run …

Answer 6

is the period after prices change but before quantity adjustment can occur.

Question 7

The long run

Answer 7

is the period needed for complete adjustment to a price change. Its length depends on the type of adjustments consumers wish to see.

Question 8

The cross-price elasticity of demand

Answer 8

… for good i with respect to changes in the price of good j is the percentage change in the quantity of good i demanded, divided by the corresponding percentage change in the price of good j.

Question 9

The budget share

Answer 9

of a good is its price times the quantity demanded, divided by total consumer spending or income.

Question 10

The income elasticity of demand

Answer 10

.. for a good is the percentage change in quantity demanded divided by the corresponding percentage change in income.

Question 11

A normal good

Answer 11

has a positive income elasticity of demand.

Question 12

An inferior good

Answer 12

has a negative income elasticity of demand.

Question 13

A luxury good

Answer 13

has an income elasticity above unity.

Question 14

A necessity

Answer 14

has an income elasticity below unity.

Question 15

The incidence of a tax

Answer 15

describes who eventually bears the burden of it.