Elasticity

Question 1

Elasticity

Answer 1

A measure of how much buyers and sellers respond to changes in Market conditions.

Allows us to analyze supply and demand with greater precision.

Question 2

Price elasticity of demand

Answer 2

Measure of how much the quantity demanded of a good responds to a change in the price of that good.

The % change in QD given a % change in the price

Question 3

Determinants of price elasticity

Answer 3

1. Availability of close substitutes
2. Necessities vs luxuries
3. Broad vs narrow markets
4. Proportion of income devoted to the product
5. Time horizon

Question 4

Demand tends to be more elastic:

Answer 4

The larger the number of close substitutes
If the good is a luxury
The more narrowly defined the market
The longer the time period

Question 5

Price elasticity of demand formula

Answer 5

% change in QD (divided by) % change in price

Question 6

Midpoint method

Answer 6

Preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.

(Q2 - Q1)/(Q2 + Q1)/2
——————————-
(P2 - P1)/(P2 + P1)/2

Question 7

Perfectly price inelastic

Answer 7

QD does not respond to price changes

Question 8

Perfectly price elastic

Answer 8

QD changes infinitely with any change in price.

Question 9

Unit price elastic

Answer 9

QD changes by the same % as the price

Question 10

Because the price elasticity of demand measures how much QD responds to the price, it is closely related to the slope of the demand curve

Question 11

Look at figures in PowerPoint

Question 12

Total revenue

Answer 12

The amount paid by buyers and received by sellers of a good.

TR = P X Q

Question 13

Price inelastic demand curve

Answer 13

An increase in price:

Decrease in quantity
Total revenue increases

Question 14

At points with a low price and a high quantity:

Answer 14

Demand is inelastic

Question 15

At points with a high price and a low quantity:

Answer 15

Demand is elastic

Question 16

Price elasticity > 1 =

Answer 16

Elastic

Question 17

Price elasticity = 1 =

Answer 17

Unit elastic

Question 18

Price elasticity < 1 =

Answer 18

Inelastic

Question 19

Income elasticity of demand

Answer 19

Measures how much the quantity demanded of a good responds to a change in consumers income.

Computed as the percentage change in the quantity demanded divided by the percentage change in income.

Higher income raises the QD for normal goods but lowers the QD for inferior goods.

Question 20

Income elasticity of demand formula:

Answer 20

Q1

DIVIDED BY

Y1

Question 21

Demand for goods regarded as necessities e.g food, fuels, clothing, utilities, medical services tends to be

Answer 21

Income inelastic

Question 22

Demand for luxuries e.g sports cars, furs, expensive foods tends to be

Answer 22

Income elastic

Question 23

Cross - price elasticity of demand

Answer 23

Measure how much the QD of one good responds to a change in price of another good

Computed as the % change in QD of the 1st good, divided by the % change in the price of the 2nd good.

Substitutes have positive cross-price elasticities
Compliments have negative cross-price elasticities

Question 24

Price elasticity of supply

Answer 24

A measure of how much the quantity supplied of a good responds to a change in price of that good. ( how responsive firms are to changes in price)

The % change in QS, resulting from a 1% change in price

Determinants:

Time period. Supply is more price elastic in the long run. (Firm is allowed to adjust its production levels)

Productive capacity and the ability of sellers to change the amount of the good they produce (if stocks are high - able to respond - elastic)

Size of the firm or industry

Mobility of factors of production

Question 25

Price elasticity of supply

Answer 25

Computed as the % change in the QS divided by the % change in price:

% change in QS
———————-
% change in price

Calculated in % in order to compare across diff goods & services.

Question 26

Price elasticity of supply

Answer 26

PES > 1 = supply is price elastic
PES < 1 = supply is price inelastic
PES = 0 = supply is perfectly inelastic

Supply is said to be price inelastic if the quantity responds only slightly to changes in the price.

Question 27

Midpoint method

Answer 27

(Q2 - Q1) / (Q2 + Q1)/2
——————————-
(P2 - P1)/(P2 + P1)/2

% change in QS over % change in prices

Question 28

Point elasticity of supply method

Answer 28

P DQs
——x———-
Qs dP

Question 29

The variety of supply curves

Answer 29

The flatter the slope of the supply curve that passes through a given point, the more elastic the supply