Elasticity

Question 1

What is the price elasticity of demand?

Answer 1

The measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same.

Question 2

How do you calculate the price elasticity of demand?

Answer 2

Price elasticity of demand = Percentage change in quantity demanded / percent change in price

Question 3

What are the ranges of elasticity of demand?

Answer 3

Perfectly inelastic
Perfectly elastic
Unit elastic

Question 4

What is perfectly inelastic

Answer 4

Consumers are completely unresponsive to price changes

Question 5

What is perfectly elastic?

Answer 5

Consumers are infinitely responsive to price changes

Question 6

What is unit elastic

Answer 6

Consumer’s response is equal to change in price in percentage terms.

Question 7

What are the factors that influence the elasticity of demand?

Answer 7

1. The availability of substitutes
2. The proportion of income spent on the good.
3. The time elapsed since a price change

Question 8

What is total revenue?

Answer 8

The sale of a good equals the price of the good multiplied by the quantity sold.

Question 9

What is the total revenue test?

Answer 9

Estimating the price of elasticity of demand by observing the change in total revenue that results from a change in the price when all other influences on the quantity sold remain the same

Question 10

How does the total revenue affect elasticity?

Answer 10

If a price cut increases total revenue demand is elastic
If a price cut decreases total revenue demand is inelastic
If a price cut leaves total revenue unchanged demand is unit elastic.

Question 11

What is the income elasticity of demand?

Answer 11

The measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same

Question 12

How do you calculate income elasticity of demand?

Answer 12

Income elasticity of demand = Percentage change in quantity demanded / percentage change in an income

Question 13

What are the different income elasticity outcomes?

Answer 13

Positive and greater than 1 is a normal good, income elastic
Positive and less than 1 is a normal good income inelastic
A negative is an inferior good.

Question 14

What is the cross elasticity of demand

Answer 14

A measure of the responsiveness of the demand for a good to changes in the price of a substitute or compliment.

Question 15

How do you calculate the cross elasticity of demand?

Answer 15

Percentage change in quantity demanded / percent change in the price of a substitute or complement.

Question 16

What is the elasticity of supply?

Answer 16

Measures the responsiveness of the quantity supplied to a change in the price of a good when all influences on selling plans remain the same

Question 17

How do you calculate the elasticity of supply?

Answer 17

Percentage change in quantity supplied / percentage change in price

Question 18

What are factors influence the elasticity of supply?

Answer 18

Resource substitution possibilities

Time frame for the supply decision

Question 19

Explain resource substitution possibilities

Answer 19

Some goods and services can be produced only by using unique or rare productive resources.
Others are common
Both have high elasticity of supply.

Question 20

How do we study the time frame for supply decision

Answer 20

Three-time frames of supply:

1. Momentary supply
2. Short-run supply
3. Long-run supply

Question 21

What is momentary supply?

Answer 21

When the price of a good changes the immediate response of the quantity supplied is determined by the momentary supply

Question 22

What is short-run supply?

Answer 22

The response of the quantity supplied to a price change when only some of the possible adjustments to production can be made is determined.

Question 23

What is a long-run supply?

Answer 23

The response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been exploited to determined by long-run supply.