Elasticity

Question 1

What is elasticity?

Answer 1

A measure of a variables sensitivity to change in another variable, usually a measure of the change in quantity demanded of a good or service in relation to price changes

Question 2

When is a product considered to be elastic?

Answer 2

If the quantity demand of that product changes more than proportionally when its price increases or decreases

Question 3

What is the formula for “price elasticity of demand?” (Ed)

Answer 3

Ed = percentage change in quantity demanded / percentage change in price

Question 4

Often, we are not given percentage changes and have to convert them ourselves, what equation do we use?

Answer 4

(new price - old price) / (old price)

X 100

Question 5

If a product has an elasticity value of “2” what does this tell us?

Answer 5

That for every 1% increase in price, quantity demanded declines by 2%

Question 6

When is a product considered “elastic demand”

Answer 6

if the percentage change in quantity demanded is bigger than the percentage change in price (Ed > 1)

Question 7

When is a product considered “inelastic”

Answer 7

When products see little change in sales even when price changes dramatically (Ed < 1), if there are no changes at all its called perfectly inelastic
Demand curves are relatively steep

Question 8

When is a product considered “unit elastic”

Answer 8

When the percentage change in quantity demanded is equal to the percentage change in price. (Ed = 1). Changes in price result from a similar percentage change in the quantity demanded
eg. shoes, cars, salon services

Question 9

What are the 4 determinants of elasticity?

Answer 9

1) Substitutes ( how many close substitutes does this product have?)
2) Proportion of income spent on the produc
3) Luxuries over necessities
4) Time period (when people have little time to adjust to price changes, demand tends to become more inelastic

Question 10

How do you measure total revenue (TR)

Answer 10

You multiply the number of units sold by the price of each Unit

Question 11

When the price of a product is low, the percentage change in price will be ________ than the percentage change in quantity, resulting in ________ demand.
When the price is high, the percentage change in price will be _________ than the percentage change in quantity, resulting in ________ demand

Answer 11

Greater; Inelastic
Less; Elastic

Question 12

What does “cross elasticity of demand” measure?

Answer 12

How responsive the quantity demanded of one good (product A) is to changes in the price of another

Question 13

If cross elasticity of demand between two products is positive, then they are __________. If the cross elasticity of demand between the products is negative, then they are _________.

Answer 13

Substitutes; Compliments

Question 14

What does “income elasticity of demand” measure?

Answer 14

How responsive the demand for a good is to changes in consumer income

Question 15

What is the formula for calculating elasticity of supply?

Answer 15

Percentage change in quantity supplied / percentage change in price

Question 16

How do you figure out if a supply curve is elastic, inelastic, and unit elastic

Answer 16

Elastic supply curves always crosses the vertical axis, and ineleastic supply curves always cross the horizontal axis. Unit elastic supply curves always go in the middle where zero is

Question 17

What’s the difference between the short-run period and a long run period

Answer 17

In the short run, at least one factor of production can’t be changed. The number of firms in the industry can’t change. In the long-run firms can alter an factors of production

Question 18

What are the 2 types of taxes?

Answer 18

Taxes on income sources and taxes on spending

Question 19

What is a progressive tax

Answer 19

Those that rise in percentage as income increases

Question 20

What are regressive taxes

Answer 20

Fall in percentage as income increases

Question 21

What are flat taxes

Answer 21

Take a constant percentage of ones income

Question 22

What are excise taxes?

Answer 22

Taxes placed on specific types of goods, like gas and alcohol.

Question 23

What is the “incidence of taxation”

Answer 23

Who bears the economic burden of a tax