Elasticity

Question 1

What is the relationship between income and demand for an inferior good?

Answer 1

For an inferior good, as incomes rise demand falls. As incomes fall, demand increases.

Question 2

Define income elasticity of demand.

Answer 2

The responsiveness of demand to a change in income. Income elasticity of demand = % change in Qd : % change in income

Question 3

Define cross price elasticity of demand.

Answer 3

The responsiveness of demand of good A to a change in price of good B. Cross price elasticity of demand = % change in Qd of good A : % change in price of good B

Question 4

Define price elasticity of supply.

Answer 4

The responsiveness of supply to a change in price. Price elasticity of supply = % change in Qs : % change in price

Question 5

Define price elasticity of demand.

Answer 5

The responsiveness of demand to a change in price. Price elasticity of demand = % change in Qd : % change in price

Question 6

What is the relationship between income and demand for a normal good?

Answer 6

For a normal good, as incomes rise so does demand. As incomes fall, so does demand.

Question 7

If there is a 5% rise in incomes and a 7% rise in demand for music downloads, what kind of goods are music downloads? Calculate the elasticity to support your answer.

Answer 7

Income elasticity of demand = % change in Qd / % change in Y = 7 / 5 = 1.4 Demand has been proportionally more responsive than income so it is elastic. The fact that as incomes have risen, demand has also risen shows the good is a normal good.

Question 8

Draw a demand curve to show a product with a) perfectly price inelastic demand b) perfectly price elastic demand.

Answer 8

See picture