Elasticity of Demand

Question 1

Elasticity

Answer 1

• is a measure of how much buyers and sellers
respond to changes in market conditions.
• is the ratio of the percentage change in one variable
to the percentage in another variable.

Question 2

Elasticity of Demand

Answer 2

is a measure of the degree of responsiveness of the quantity
demanded of a product to given change in one of the independent
variables that affect demand for that product.

Question 3

Classification of demand elasticity:

Answer 3

• Price elasticity
• Income elasticity
• Cross elasticity of demand

Question 4

Price Elasticity of Demand

Answer 4

• is the percentage change in quantity demanded given a percent
change in the price.
• It is a measure of how much the quantity demanded of a good
responds to a change in the price of that good.

Question 5

PED=/midpoint method/

Answer 5

(Q2-Q1)/[(Q1+Q2)]/(P2-P1)/[(P1+P2)]

Question 6

Sign of PED

Answer 6

The midpoint formula is preferable when calculating the
price elasticity of demand because it gives the same answer
regardless of the direction of the change

PED is always negative, but analyzing and interpreting the
coefficient, ignore the negative sign, and interpret only the
absolute value.

Question 7

Types of elasticity

Answer 7

1. Inelastic demand
2. Elastic demand
3. Perfectly inelastic demand
4. Unit elastic demand
5. Perfectly elastic demand

Question 8

Inelastic

Answer 8

0CQ

Small change in Q

Question 9

Perfectly Inelastic

Answer 9

E=0
perpendicular to y axis
vertical

Question 10

Elastic

Answer 10

1>E

CP

Question 11

Perfectly Elastic

Answer 11

E=infinity
perpendicular to x axis
horizontal

Question 12

Determinants of PED

Answer 12

Availability of substitute goods
• Proportion of the purchaser’s
budget consumed by the item
• Degree of necessity
• Duration of price change
• Breadth of definition of a good
• Brand loyalty

Question 13

If the good is a necessity.

Answer 13

Inelastic

Question 14

If it takes a small portion of the budget.

Answer 14

Elastic

Question 15

• If the time period is shorter.

Answer 15

Inelastic

Question 16

The smaller the number of close substitutes.

Answer 16

Inelastic

Question 17

The good is not a necessity

Answer 17

Elastic

Question 18

The more broadly defined the market.

Answer 18

Inelastic

Question 19

If it takes a large portion of the budget.

Answer 19

Inelastic

Question 20

Long run

Answer 20

Elastic

Question 21

Short run

Answer 21

Inelastic

Question 22

Well-known

Answer 22

Inelastic

Question 23

Not well-known

Answer 23

Elastic- difficult to find close substitutes

Question 24

The narrowly defined the market.

Answer 24

Elastic-easier to find close substitutes

Question 25

Total revenue

Answer 25

is the amount paid by buyers and received by

sellers of a good.

Question 26

Total Revenue equals?

Answer 26

Computed as the price of the good times the quantity sold.
Total Revenue (TR) = Price of Good (P) x Quantity sold (Q)

Question 27

Increase in Price Inelastic

Answer 27

Increase in Total Revenue

Question 28

Increase in Price Elastic

Answer 28

Decrease in Total Revenue

Question 29

Decrease in Price Elastic

Answer 29

Increase in Total Revenue

Question 30

Decrease in Price Inelastic

Answer 30

Decrease in Total Revenue

Question 31

The income elasticity of

demand

Answer 31

is the percentage change in
quantity demanded divided by the
percentage change in income, as
follows:

Question 32

Normal Goods

Answer 32

Income Elasticity is positive.

Question 33

• A higher level of income for a normal good

Answer 33

causes a demand curve to shift to the right for a normal good, which means
that the income elasticity of demand is positive.
• A higher income elasticity means a larger shift.

Question 34

Inferior Goods:

Answer 34

Income Elasticity is negative.

Question 35

• Inferior good—a higher level of income would cause

Answer 35

the demand curve for
that good to shift to the left.
• Again, how much it shifts depends on how large the (negative)
income elasticity

Question 36

Cross Price Elasticity of Demand

Answer 36

Elasticity measure that
looks at the impact a
change in the price of one
good has on the demand of
another good.

Question 37

XED Positive: Substitute Goods

Answer 37

If good A is a substitute for good B, like coffee and tea, then a
higher price for B will mean a greater quantity of A consumed.

Question 38

XED Negative: Complementary Goods

Answer 38

If good A is a complement for good B, like coffee and sugar, then
a higher price for B will mean a lower quantity of A consumed.