Elasticity and its application Flashcards
What is the price elasticity of demand?
Answer: It is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other factors remain the same.
What is the difference between elastic and inelastic demand?
Answer: Elastic demand means the quantity demanded is very responsive to price changes (PED > 1). Inelastic demand means the quantity demanded is less responsive to price changes (PED < 1).
What is perfectly inelastic demand?
Answer: A price elasticity of 0, where the quantity demanded remains constant regardless of price changes (e.g., insulin).
What is perfectly elastic demand?
Answer: A price elasticity where the quantity demanded changes infinitely in response to a small price change (PED = ∞).
What is unit elastic demand?
Answer: The percentage change in the quantity demanded is exactly equal to the percentage change in price (PED = 1).
What are the key factors that influence the price elasticity of demand?
Answer: Closeness of substitutes, proportion of income spent on the good, and the time elapsed since the price change.
How does elasticity affect total revenue?
Answer: If demand is elastic, a price decrease increases total revenue; if demand is inelastic, a price decrease decreases total revenue.
What is cross elasticity of demand?
Answer: It measures the responsiveness of the demand for a good to a change in the price of a substitute or complement.
What is income elasticity of demand?
Answer: It measures the responsiveness of demand to changes in income, which can indicate whether a good is normal or inferior.
What affects the elasticity of supply?
Answer: Resource substitution possibilities, and the time frame for the supply decision (momentary, short-run, and long-run supply).
Price elasticity of demand measures:
a) The change in price due to changes in demand.
b) The responsiveness of quantity demanded to a change in price.
c) The effect of income changes on demand.
d) The change in demand due to a change in supply.
Answer: b) The responsiveness of quantity demanded to a change in price.
If the demand for a good is inelastic, a 1% increase in price will:
a) Increase total revenue.
b) Decrease total revenue.
c) Keep total revenue unchanged.
d) Decrease the quantity demanded by more than 1%.
Answer: a) Increase total revenue.
Which of the following goods is likely to have perfectly inelastic demand?
a) Luxury cars.
b) Pizza.
c) Insulin for diabetics.
d) Soft drinks.
Answer: c) Insulin for diabetics.
Which of the following best describes unit elastic demand?
a) A change in price leads to no change in quantity demanded.
b) A change in price leads to a proportionally equal change in quantity demanded.
c) A small change in price leads to an infinite change in quantity demanded.
d) A large change in price leads to a small change in quantity demanded.
Answer: b) A change in price leads to a proportionally equal change in quantity demanded.
Cross elasticity of demand between two goods is positive when:
a) The goods are complements.
b) The goods are substitutes.
c) The goods are unrelated.
d) One good is inferior and the other is normal.
Answer: b) The goods are substitutes.
If the price elasticity of demand for a good is 0.5, the demand is:
a) Perfectly elastic.
b) Elastic.
c) Inelastic.
d) Unit elastic.
Answer: c) Inelastic.
Which of the following goods is likely to have elastic demand?
a) Gasoline in the short term.
b) A specific brand of soft drink.
c) Salt.
d) Water.
Answer: b) A specific brand of soft drink.
When demand is perfectly elastic, the demand curve is:
a) Vertical.
b) Upward sloping.
c) Horizontal.
d) Steep.
Answer: c) Horizontal.
The closer the substitutes for a good, the:
a) More elastic the demand for the good.
b) More inelastic the demand for the good.
c) Less sensitive demand is to price changes.
d) Flatter the supply curve becomes.
Answer: a) More elastic the demand for the good.
When the percentage change in the quantity demanded is smaller than the percentage change in price, demand is:
a) Elastic.
b) Inelastic.
c) Unit elastic.
d) Perfectly elastic.
Answer: b) Inelastic.
