Elasticity

Question 1

Elasticity

Answer 1

A measure of the responsiveness of the quantity demanded (or supplied) to a changes in one of the determinants of demand (or supply) holding all remaining determinants constant.
ɛ=(%△Q)/(%△X)=(Percentage change in Qty Demanded)/(Percentage change in determinant of demand)

Question 2

Elasticity Units

Answer 2

Elasticities do not have units.

Question 3

Point Elasticities of Demand

Answer 3

Use the point elasticity of demand formula when you have one observation of quantity demanded the determinant of demand (Q and X).
ɛ=∆Q/∆X×X/Q

Question 4

Arc Elasticities of Demand

Answer 4

Use the arc elasticity of demand formula when you have two observations of quantity demanded the determinant of demand (Q and X).
ɛ= (Q_2-Q_1)/(X_2-X_1 )×(X_2+X_1)/(Q_2+Q_1 )

Question 5

Own Price Elasticity of Demand:

Answer 5

A measure of the responsiveness of the quantity demanded of a good or service to a change in the price of the good or service holding all other factors constant.

Question 6

Interpreting Elasticity

Answer 6

• An own price elasticity of demand of -1.75 (or 1.75 stated as an absolute value) means that a 1% increase in price will lead to a %1.75 decrease in the quantity demanded.
• Alternatively, a 1% decrease in price will lead to a %1.75 increase in the quantity demanded.
• The higher the elasticity (in absolute value), the more responsive the quantity demanded is to a change in price.

Question 7

Inelastic Demand

Answer 7

Demand for a good or service with the property that a change in price causes a less than proportionate change in quantity demanded.

Question 8

Elastic Demand:

Answer 8

Demand for a good or service with the property that a change in price causes a more than proportionate change in quantity demanded.

Question 9

|ɛP | = ∞

Answer 9

Perfectly Elastic Demand/Supply

Question 10

|ɛP | > 1

Answer 10

Elastic Demand/Supply

Question 11

|ɛP | = 1

Answer 11

Unit Elastic Demand/Supply

Question 12

|ɛP | < 1

Answer 12

Inelastic Demand/Supply

Question 13

|ɛP | = 0

Answer 13

Perfectly Inelastic Demand/Supply

Question 14

Own Price Elasticity of Supply

Answer 14

A measure of the responsiveness of the quantity supplied of a good or service to a change in the price of the good or service holding all other factors constant.

Question 15

Cross Price Elasticity of Demand

Answer 15

A measure of the responsiveness of the quantity demanded of one good or service to a change in the price of a second good or service holding all other factors constant.
If an increase in the price of one good (positive change) causes an increase in the quantity demanded of a second good (positive change) then the two goods are substitutes and the cross price elasticity of demand is positive.
If an increase in the price of one good (positive change) causes a decrease in the quantity demanded of a second good (negative change) then the two goods are complements and the cross price elasticity of demand is negative.

Question 16

Income Elasticity of Demand

Answer 16

A measure of the responsiveness of the quantity demanded of a good or service to a change in income holding all other factors constant.
If an increase in income (positive change) causes an increase in the quantity demanded of a good (positive change) then it is a normal good and the income elasticity of demand is positive.
If an increase in income (positive change) causes a decrease in the quantity demanded of a good (negative change) then it is an inferior good and the income elasticity of demand is negative.