Elasticity

Question 1

Elasticity

Answer 1

A measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. Measures how much demand responds to change.

Question 2

Price Elasticity of Demand

Answer 2

A measure of how much the quantity demanded of a good responds to a change in the price of a good, calculated as the percentage change in quantity demanded divided by the percentage change in price.

Question 3

General Rules for Price Elasticity of Demand: Availability of Close Substitutes

Answer 3

Goods with close substitutes tend to have a more elastic demand, due to it being easy for consumers to switch from one good to another.

Question 4

General Rules for Price Elasticity of Demand: Necessities vs Luxuries

Answer 4

Necessities tend to have an inelastic demand as people have to have them, no matter the price.

Luxuries are considered to be elastic, as they are not an essential in life and therefore if they are too expensive then consumers will forgo purchasing them.

Question 5

General Rules for Price Elasticity of Demand: Definition of the Market

Answer 5

Narrowly defined markets tend to have a more elastic demand than broadly defined markets. This is due to it being easier to find substitutes for narrowly defined goods.

Question 6

General Rules for Price Elasticity of Demand: Time Horizon

Answer 6

Goods tend to have more elastic demand over longer time horizons.

Question 7

When is demand elastic?

Answer 7

Demand is elastic when elasticity is greater than 1.

Elastic curves look like an E

Question 8

When is demand inelastic?

Answer 8

Demand is considered to be inelastic when the elasticity is less than 1.
Inelastic curves look like an I

Question 9

Total Revenue in Market

Answer 9

The amount paid by buyers and received by sellers of the good. In any market total revenue = P x Q

Question 10

Income Elasticity of Demand

Answer 10

Used to measure how the quantity demanded changes as consumer income changes.
Quantity demanded and income move in the same direction
Normal goods have positive income elasticities
Inferior goods have negative income elasticities.
Higher the income raises the quantity demanded for normal goods, but lowers the quantity demanded

Question 11

Cross Price Elasticity of Demand

Answer 11

Measures how the quantity demanded of one good changes as the price of another good changes.
Where this is a positive or negative number depends on whether the two goods are complements or substitutes.
Substitutes are seen as elastically positive.
Complements are seen as cross-price elasticity being negative.

Question 12

Price Elasticity of Supply

Answer 12

A measure of how much the quantity of a supplied of a good responds to a change in the price of that good.
Supply of a good is said to be elastic if it responds substantially to a price change.
Supply of a good is said to be inelastic if the quantity supplied only alters slightly to a change in price.

Question 13

Computing Price Elasticity of Demand

Answer 13

Price elasticity of demand=
Percentage change in quantity demanded

divided

Percentage change in price

Question 14

Inelastic Demand Defintiion

Answer 14

Quantity demanded does not respond strongly to price changes.
Absolute value of Price elasticity of demand is less than one.
(%∆𝑄𝑑)/(%∆𝑃)<1

Question 15

Total Revenue: Inelastic Demand

Answer 15

inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases.

Question 16

Total Revenue: Elastic Demand

Answer 16

elastic demand curve, an increase in the price leads to a decrease in quantity demanded that is proportionately larger. Thus, total revenue decreases.

Question 17

What quantity of a good should a consumer purchase?

Answer 17

Consider Marginal Benefit (MB) and Marginal Cost (MC)
Maximization (of consumer satisfaction, firm profit, social welfare, efficiency etc) occurs when:

MB = MC

Question 18

Consumer Surplus

Answer 18

The area lying below the demand curve and above the equilibrium price
The difference between what the consumer is willing to pay (MB), and what they have to pay (the price

Question 19

Producer Surplus

Answer 19

The area lying above the supply curve and below the equilibrium price
The difference between what the producer is willing to supply the good for (MC), and what they actually get (the price)

Question 20

Effects of Price Ceilings

Answer 20

Lost consumer surplus
Lost producer surplus
Lower quantity traded
Less consumed
Some producer surplus is transferred
tends to adversely affect the very people it is meant to protect!
unintended consequence