Elasticities of demand and supply Summary

Question 1

Unless otherwise specified, the elasticity of demand refers..

Answer 1

to the own-price elasticity. It measures the sensitivity of quantity demanded to changes in the own price of a good, holding constant the prices of other goods and income.

Question 2

Demand elasticities are ..

Answer 2

negative since demand curves slope down. In general, the demand elasticity changes as we move along a given demand curve. Along a straight-line demand curve, elasticity falls as price falls.

Question 3

Demand is elastic if ..

Answer 3

the price elasticity is more negative than –1 (for example –2). Price cuts then increase total spending on the good.

Question 4

Demand is inelastic if..

Answer 4

the demand elasticity lies between –1 and 0. Price cuts then reduce total spending on the good.

Question 5

Demand is unit elastic if ..

Answer 5

the demand elasticity is –1. Price changes then have no effect on total spending on the good.

Question 6

The demand elasticity depends on…

Answer 6

how long customers have to adjust to a price change. In the short run, substitution possibilities may be limited.

Question 7

Demand elasticities will typically rise (become more negative) with..

Answer 7

the length of time allowed for adjustment. The time required for complete adjustment varies from good to good.

Question 8

The cross-price elasticity of demand measures..

Answer 8

the sensitivity of quantity demanded of one good to changes in the price of a related good

Question 9

Positive cross-elasticities tend to imply ..

Answer 9

that goods are substitutes, negative cross-price elasticities that goods are complements.

Question 10

The income elasticity of demand measures..

Answer 10

the sensitivity of quantity demanded to changes in income, holding constant the prices of all goods.

Question 11

Inferior goods have ..

Answer 11

negative income elasticities of demand. Higher incomes reduce the quantity demanded and the budget share of such goods.

Question 12

Luxury goods have income elasticities larger than..

Answer 12

1. Higher incomes raise the quantity demanded and the budget share of such goods.

Question 13

Goods that are not inferior are called normal goods and have ..

Answer 13

positive income elasticities of demand. Goods that are not luxuries are called necessities and have income elasticities less than 1.

Question 14

All inferior goods are..

Answer 14

necessities but normal goods are necessities only if they are not luxuries.

Question 15

Doubling all nominal variables should have ..

Answer 15

no effect on demand since it alters neither the real value (purchasing power) of incomes nor the relative prices of goods.

Question 16

In examining data from economies experiencing inflation, it is often best to look at ..

Answer 16

real prices and real incomes, adjusting prices and incomes for the effect of inflation.

Question 17

The supply elasticity measures..

Answer 17

the percentage response of quantity supplied to a 1 per cent increase in the price of the commodity. Since supply curves slope up, the supply elasticity is positive.

Question 18

Tax incidence measures ..

Answer 18

who eventually pays the tax. Since taxes induce changes in equilibrium prices and quantities, this can be very different from the people from whom the government appears to collect the money.

Question 19

For specific taxes, slopes of supply and demand curves are..

Answer 19

relevant. For ad valorem taxes, elasticities of supply and demand are relevant. In either case, it is the relatively more price insensitive side of the market that bears more of the burden of a tax.