Elasticity

Question 1

What is the formulae for Price Elasticity of demand?

Answer 1

Question 2

What is the price elasticity of demand if the price rises by 10% and Q falls by 15 %?

Answer 2

15%/10%=1.5

Question 3

Are elasticities reported as negative, positive or does that depend on the situation?

Answer 3

positive (even though it is a negative devided by a positive)

Question 4

Why do we use the midpoint method?

Answer 4

1) see picture

Question 5

what is the midpoint method?

Answer 5

(end value - start value) / midpoint

Question 6

What are the determinants of price elasticity?

Answer 6

1) Price elasticity is higher when close substitutes are avaibable (breakfast cereal vs. sunscreen)
2) price elasticity is higher for narrowly defined goods than for broadly defined ones (jeans vs. clothing)
3) Price elasticity is higher for luxuries than for neccessities (a cruise vs. insulin)
4) Price elasticity is higher in the long run than in the short run (gasoline in short and long run)

Question 7

What is the relationship between the demand curve and elasticity of demand?

Answer 7

Rule of thumb: The flatter the curve, the bigger the elasticity.
The steeper the curve, the smaller the elasticity.

Question 8

What are the five classifications of D curves?

Answer 8

1. Perfectly inelastic demand: delta-q/delta-p= 0
   
   1. D-curve is vertical
2. Inelastic demand: delta-q/delta-p < 1
   
   1. D-curve is relatively steep
3. delta-q/delta-p = 1
   
   1. D-curve has intermediate slope
4. Elastic demand: delta-q/delta-p > 1

D-curve is relatively flat

5. Perfectly elastic: delta-q/delta-p = infinity
   
   1. D-curve is flat

Question 9

Does the elasticity change or is it constant at different points of a demand curve?

Answer 9

Question 10

What is the relationship between elasticity and revenue?

Answer 10

When D is elastic a price increase causes revenue to fall (and the other way around)

Question 11

What is the formulae for price elasticity of supply?

Answer 11

Question 12

What are the five classifications of S curves?

Answer 12

• Perfectly inelastic supply: delta-q/delta-p= 0
  
  • S-curve is vertical
• Inelastic supply: delta-q/delta-p < 1
  
  • S-curve is relatively steep
• Unit elastic: delta-q/delta-p = 1
  
  • S-curve has intermediate slope
• Elastic supply: delta-q/delta-p > 1
  
  • S-curve is relatively flat
• Perfectly supply: delta-q/delta-p = infinity
  
  • S-curve is flat

Question 13

What are the determinantes of supply elasticity?

Answer 13

1) The easier it is for the seller to change the quantity they supply
2) Short run vs. long run (elasticity is greater in the long run)

Question 14

What are two other types of elasticity?

Answer 14

1) Income elasticity of demand
- Measures the response of Qd to a change in consumer income –> for normal goods income elasticity is > 0, for inferier < 0.
2) Cross-price elasticity of demand
- Measures the response of demand for one good to changes in price of another good
- For substitutes, cross-price elasticity > 0
- For complements, cross-price elasticity is < 0