Elasticity

Question 1

Price Elasticity Definition

Answer 1

Ratio between % change in quantity demanded or supplied compared to corresponding change in price

Question 2

Price Elasticity of Demand Equation

Answer 2

% change in Qd / % change in P

Question 3

Price Elasticity of Supply Equation

Answer 3

% change in Qs / % change in P

Question 4

Elastic Demand/Supply Equation

Answer 4

% change in Q / % change in P > 1

High response in D/S to changes in price

Question 5

Unitary Elasticity Demand/Supply Equation

Answer 5

% change in Q / % change in P = 1

Equal response in D/S compared to changes in P

Question 6

Inelastic Demand/Supply Equation

Answer 6

% change in Q / % change in P < 1

Low response in D/S compared to changes in P

Question 7

Midpoint Elasticity Equation for Q

Answer 7

% change Q = {(Q2-Q1) / [(Q2-Q1)/2] X 100}

Question 8

Midpoint Elasticity Equation for P

Answer 8

% change P = {(P2-P1) / [(P2-P1)/2] X 100}

Question 9

Constant Unitary Elasticity

Answer 9

Occurs when a price change of 1% creates and equal D/S change of 1%

Question 10

Elastic Demand and the Effect on Revenue

Answer 10

If price is raised on an elastic good, which has a high response to price changes, there will be a large shift in demand and a loss in revenue.

Question 11

Unitary Elasticity of Demand and the Effect on Revenue

Answer 11

If price is raised on a unitarily elastic good, which has an equal reaction to price changes, there will be no change in overall revenue

Question 12

Inelastic Demand and the Effect on Revenue

Answer 12

If price is raised on an inelastic good, which has a low response to price changes, there will be a small shift in demand and a gain in revenue

Question 13

What Effect do Taxes Have on Supply and Demand

Answer 13

The tax burden falls on the most inelastic side of the market

If D is more inelastic than S the consumers bear the tax burden

Question 14

What Effect do Taxes Have on Inelastic Demand?

Answer 14

There is a low response in demand to price changes so the consumer pays the higher price and takes the tax burden

Question 15

What Effect do Taxes Have on Elastic Demand?

Answer 15

There is a high response in demand to price changes so the supplier takes on the tax burden

Question 16

What Effect do Taxes Have on Inelastic Supply?

Answer 16

Changes in price do not have a large impact on Q but a large impact on P

Businesses are forced to take the lower price and take on the burden

Question 17

What Effect do Taxes Have on Elastic Supply?

Answer 17

Changes in price have a large impact on Q but a small impact on price

Consumers are forced to take on the burden of the tax

Question 18

Government requires auto manufacturers to install new equipment that costs $2,000 per car.

What conditions are needed for consumers to pass this to buyers?

What conditions force the manufacturer to pay?

Answer 18

If demand is more inelastic than supply then the consumer takes the price of the equipment

If demand is more elastic than supply then the supplier takes the price of equipment

Question 19

Assume that the company wants to earn as much revenue as possible. If the elasticity of demand for your company’s product at the current price is 1.4, would you advise the company to raise the price, lower the price, or to keep the price the same? What if the elasticity were 0.6? What if it were 1?

Answer 19

If elasticity > 1 than an increase in price will cause a large decrease in Qd compared to P and a loss in revenue.

If elasticity is >1 a decrease in P will cause a large increase in Qd compared to P and an increase in revenue

If elasticity is < 1 than an increase in price will create a smaller decrease in Qd compared to P and an overall increase in revenue.

If elasticity is <1 than a decrease in P will create a smaller decrease in Qd compared to P and an overall decrease in revenue

If elasticity = 1 overall revenue stays the same no matter which direction price goes

Question 20

If demand is elastic, will shifts in supply have a larger impact on Q or P?

Answer 20

A shift in S will have a large impact on Q and a small impact on P

Question 21

If supply is elastic, will shifts in demand have a larger effect on Q or P?

Answer 21

A shift in D will have a large impact on P and a small impact on Q

Question 22

Income Elasticity of Demand Equation and the Effects on Normal/Inferior goods

Answer 22

% change in Qd / % change in income

+ elasticity of demand: a rise in income causes an increase in Qd = normal good

• elasticity: rise in income causes a decrease in Qd = inferior good

Question 23

Cross-Price Elasticity of Demand

Answer 23

% change in Qd of A / % change in P of B

Question 24

Cross-Price Elasticity of Demand and the Effects on Complimentary/Substitute Goods

Answer 24

+ cross-price elasticity then the goods are substitutes

• cross-price elasticity then the goods are compliments

Question 25

Wage Elasticity of Labor Supply

Answer 25

% change in Q in L supplied / % change in wage

change in hours worked / change in wages

Question 26

Elastic Wage Elasticity of Labor Supply

Answer 26

A small change in wages creates a large change in labor hours worked

• younger people are willing to work more for a small increase in wages

Question 27

Inelastic Wage Elasticity of Labor Supply

Answer 27

A large change in wages crates a small change in labor hour worked

• older workforce is less willing to work more hours when wages increase