Lecture 7

Question 1

What is the importance of knowing about the responsiveness of demand?

Answer 1

so that appropriate policies can be designed to alter it if required.

Responsiveness are referred to as the elasticity of demand

Question 2

How is elasticity of demand reflected?

Answer 2

it is reflected in the shape and slope of the demand curve.

Question 3

What is price elasticity of demand?

Answer 3

Responsiveness of quantity demanded to a change in price.

For many goods and services, a price increase means that people buy less, but in some cases the price rise has very little impact on quantities consumed.

Question 4

What is demand said to be if the quantity demanded remains constant when the price changes?

Answer 4

Perfectly inelastic.

Question 5

What is an example of a good with low elasticity of demand?

Answer 5

Insulin

Insulin is of such importance to some diabetics that a price change is unlikely to have much effect on the amount patients will purchase

Question 7

What does it mean if the elasticity of demand is 1?

If the percentage change in the quantity demanded equals the percentage change in price, the elasticity of demand is 1

Answer 7

Demand is unit elastic

Question 8

What is the meaning of a price elasticity of demand less than 1?

When the percentage change in the quantity demanded is less than the percentage change in price

Answer 8

Demand is inelastic

Question 9

Give two examples of goods that are typically inelastic in demand.

Answer 9

Petrol and tobacco

Question 10

What is the interpretation of a price elasticity of demand of infinity?

If the quantity demanded is infinitely responsive to a price change

Answer 10

Demand is perfectly elastic

Question 11

When is demand considered to be elastic?

Answer 11

When the percentage change in the quantity demanded exceeds the percentage change in price, the price elasticity of demand is greater than 1 and demand is said to be elastic

Cereal and shampoo are examples of goods typically with elastic demand

In health care, the demand for some forms of cosmetic surgery is elastic.

Question 12

Price Elasticity of Demand

What does it mean if the price elasticity of demand (PED) is greater than 1?

Answer 12

Demand is price elastic (demand is sensitive to price changes)

Question 13

What does PED = 1 indicate?

Answer 13

demand is unit elastic

Question 14

What does PED < 1 indicate?

Answer 14

demand is price inelastic

Question 15

What is elasticity concerned with?

Answer 15

absolute value

Elasticity is not the slope (the slope measures the absolute change in one variable given an absolute change in another variable and depends on the unit in which the good is measured

Question 16

What is the formula for price elasticity of demand?

Answer 16

Percentage change in quantity demanded divided by percentage change in price

[Change in Quantity] / [(Q1 + Q2)/2] _________________________________________________

[Change in Price] / [(P1 + P2)/2]

Question 17

What is the PED:

Consider the demand on paracetamol, initially the price is 5 per pack and 17 packs are sold per week (point A). The price increases to 6 per pack and the quantity demanded decreases to 15 pack per week (point B).

Answer 17

• %change in quantity demanded= ΔQ/Qave = (-2/16) = - 0.13
• %change in Price= ΔP/Pave = (1/5.50) = 0.18
• PED= -0.13/0.18= - 0.72

Question 18

What is the economic interpretation for PED= (-0.72)?

Answer 18

Demand is not very sensitive to price changes

Question 19

What is the relationship between price and quantity demanded in this scenario?

PED= -0.72

Answer 19

1 percent fall in price leads to 0.72 percent rise in quantity demanded

Question 20

What is the factors that affects price elasticity of demand?

Answer 20

1. Availability of substitute goods
2. Percentage of income
3. Time period
4. Necessity
5. Who pays
6. Brand loyalty

Question 21

How Availability of substitute goods affects price elasticity of demand?

Answer 21

The more and closer the substitutes available, the higher elasticity is likely to be

as people can easily switch from one good to another if an even minor price change is made.

Question 22

How Percentage of income affects price elasticity of demand?

Answer 22

goods that take a large portion of a consumers income tend to have greater elasticity

Question 23

How does the time period affect price elasticity of demand?

Answer 23

Elasticity tends to be greater over the long run

As consumers have more time to adjust their behavior and to search for substitutes.

Question 24

What is the relationship between necessity and price elasticity of demand?

Answer 24

The more necessary a good is, the lower the elasticity

as people will attempt to buy it no matter how much the price is, such as in the case of insulin for those who need it.

Question 25

What factor affects demand elasticity when the purchaser does not directly pay for the good they consume?

Answer 25

Who pays

such as in the case of employer-sponsored health insurance

Question 26

What factor affects demand elasticity when consumers are attached to a certain brand?

Answer 26

Brand loyalty

Question 27

Why is the overall demand for health care services expected to be relatively inelastic?

Answer 27

Few close substitutes for medical services

Question 28

What is the general relationship between being sick and price sensitivity?

Answer 28

Being sick usually reduces price sensitivity.

Question 29

What is an exception to the rule that being sick reduces price sensitivity?

Answer 29

Elective surgery like plastic surgery.

Question 30

What do most studies find about patient sensitivity to changes in healthcare prices?

Answer 30

Patients are fairly insensitive to changes in healthcare prices.

Question 31

If demand is price elastic, what will happen to revenue if the price is increased?

Answer 31

Revenue will decrease.

If demand is price inelastic then revenue will
increase if price goes u

Question 32

What happens to revenue when the price of the influenza vaccine goes up?

Answer 32

Revenue increases

Question 33

What is the effect of a reduction in the quantity sold on revenue?

Answer 33

Decrease in revenue

Question 34

Why would increasing the price of the influenza vaccine increase revenue?

Answer 34

Because demand is price inelastic

Question 35

What is cross-price elasticity of demand?

Answer 35

Percentage change in quantity demanded divided by the percentage change in the price of another related good.

Question 36

What does the cross-elasticity of demand measure?

Answer 36

The responsiveness of quantity demanded to a change in price of a related good.

Question 37

How does the cross-elasticity of demand indicate whether goods are complements or substitutes?

Answer 37

If it is less than zero, the goods are complements. If it is more than zero, the goods are substitutes.

Question 38

What effect does a positive change in price have on quantity demanded for complements?

Answer 38

It brings about a negative change in quantity demanded.

Question 39

What effect does a positive change in price have on quantity demanded for substitutes?

Answer 39

It brings about a positive change in quantity demanded.

Question 40

How does the closeness of substitutes affect the cross-price elasticity of demand?

Answer 40

The closer the substitute, the higher the cross-price elasticity of demand.

Question 41

What is income elasticity of demand?

Answer 41

Percentage change in quantity demanded divided by the percentage change in population income.

Question 42

What does a positive income elasticity of demand indicate?

Answer 42

Normal good.

Question 43

What does a negative income elasticity of demand indicate?

Answer 43

Inferior good.

Question 44

How can the impact of introducing or raising user fees be analyzed?

Answer 44

Using estimates of price elasticity