Lecture 7

Question 1

Formula for income elasticity of demand

Answer 1

%change in Q/ % change in Income

Question 2

describe income elasticity of demand

Answer 2

The income elasticity of demand measures how the
quantity demanded of a good responds to a change in income, other things remaining the same.

Question 3

describe “income elastic”

Answer 3

This means the income elasticity of demand is greater than 1, demand is income elastic and the good is “normal”

Question 4

Describe “income inelastic”

Answer 4

This means the income elasticity of demand is greater than zero but less than one, demand is inelastic, and good is “normal.”

Question 5

Describe “negative”

Answer 5

Income elasticity is less than zero and the good is “inferior”

Question 6

Describe cross elasticity of demand

Answer 6

The measures of the responsiveness of demand for a good to change in the price of a substitute or a complement good.

Question 7

formula for cross elasticity of demand

Answer 7

%change in Q/ %change in P (other good)

Question 8

The cross elasticity of demand between two substitutes is…

Answer 8

positive (skis &snowboard)

Question 9

The cross elasticity of demand between complements is…

Answer 9

Negative (Coffee & Cream)

Question 10

describe price elasticity of supply

Answer 10

The elasticity of supply measures the responsiveness of the quantity supplied
to a change in the price of a good when all other influences on selling plans
remain the same.

Question 11

Formula to calculate the elasticity of supply

Answer 11

%change in Q supplied/ %change in price

Question 12

Elasticity of supply is “perfectly elastic” when…

Answer 12

Magnitude is infinity, the smallest possible increase in price causes a huge increase in quantity supplied./

Question 13

Elasticity of supply is “elastic” when…

Answer 13

Magnitude is less than infinity but greater than 1; the percent increase in quantity supplied exceeds the percent increase in the price.

Question 14

Elasticity of supply is “ unit elastic” when…

Answer 14

Magnitude is one, the percent increase in quantity supplied equals the percent increase in price

Question 15

Elasticity of supply is “inelastic” when…

Answer 15

Magnitude is greater than zero but less than one, the percent increase in quantity supplied is less than the percent increase in the price

Question 16

The elasticity of supply is “ perfectly inelastic” when…

Answer 16

magnitude is zero, the quantity supplied is the same at all prices.

Question 17

Factors that influence elasticity of supply

Answer 17

-resource substitution possibilities (how available resources are)
-time frame for supply decision ( takes time to respond to changes)

Question 18

describe resource sub. possibilities

Answer 18

The easier it is to substitute among the resources used to produce a good or
service, the greater is its elasticity of supply.

Question 19

Describe time frame for supply decision

Answer 19

The more time that passes after a price change, the greater is the elasticity of
supply.
 Short-run supply is somewhat elastic.
 Long-run supply is the most elastic.