Elasticity - Price

Question 1

the law of demand tell us there is an ________ relationship between price and quantity demanded

Answer 1

inverse

Question 2

what is elasticity?

Answer 2

a measure of how sensitive consumers are to price changes

Question 3

define an elastic curve

Answer 3

increase in price reduces quantity demanded a lot

Question 4

define an inelastic curve

Answer 4

increase in price reduces quantity demanded slightly

Question 5

define price elasticity of demand

Answer 5

%changeP

Question 6

how do we calculate %change? (simple)

Answer 6

Initial Q/P

Question 7

how do we calculate %change? (midpoint)

Answer 7

changeQ/P
—————– x100
Avg. X

Question 8

how do we calculate average value of X?

Answer 8

                        2

Question 9

If |Ed| > 1…

Answer 9

elastic

Question 10

If |Ed| < 1…

Answer 10

inelastic

Question 11

If |Ed| = 1…

Answer 11

unit elastic

Question 12

If |Ed| curve is vertical…

Answer 12

perfectly inelastic (0)

Question 13

If |Ed| curve is horizontal…

Answer 13

perfectly elastic (infinity)

Question 14

how to calculate total revenue?

Answer 14

TR = P x Q

Question 15

when demand is inelastic, the ____________ dominate the __________

Answer 15

price effect, quantity effect

Question 16

when demand is elastic, the ____________ dominate the __________

Answer 16

quantity effect, price effect

Question 17

when inelastic, total revenue will __________ when prices increases

Answer 17

increase

Question 18

when elastic, total revenue will __________ when prices increases

Answer 18

decrease

Question 19

when unit elastic, the quantity effect ____ the price effect so a price increase ______ the reduction in quantity demanded, so total revenue ____

Answer 19

equals, balances, is unaffected

Question 20

what factors affect Price Elasticity of Demand?

Answer 20

1) availability of close substitutes
2) whether good is necessity/luxury
3) share of income spent on good
4) length of time elapsed since price change

Question 21

how does availability of substitutes affect PeD?

Answer 21

fewer substitutes - harder for consumers to limit Q when P changes (inelastic)

many substitutes - easier for consumers to switch when P changes (elastic)

Question 22

how does whether good is necessity/luxury affect Ped?

Answer 22

necessities - Q changes little when P changes

luxuries - more sensitive to P changes

Question 23

how does share of income spent on good affect PeD?

Answer 23

less sensitive to P changes when good feels cheap (opposite when feels expensive)

Question 24

how does length of time since P change affect PeD?

Answer 24

less time = more elasticity, can find substitutes