lesson 10- elasticity

Question 1

what is elasticity?

Answer 1

a measure of the extent to which a quantity responds to a change in price

Question 2

what is elastic price elasticity of demand

Answer 2

the % change in demand is greater than the % change in price
PED>1

Question 3

what is inelastic price elasticity of demand

Answer 3

the % change in demand is less than the % change in price
PED<1

Question 4

what is the PED formula?
+rules

Answer 4

PED=(%change in demand)/(%change in price)
-always negative
if PED
=0-perfectly inelastic
=0<1-inelastic
=1-unitary
=>1-elatic

Question 5

what are the determinants of PED?

Answer 5

Substitutes
Percentage of income
Luxury goods
Addiction
Time

Question 6

draw perfectly elastic demand

Answer 6

horizontal demand line
-as a change in price results in no demand at all

Question 7

draw perfectly inelastic demand

Answer 7

vertical lime
-if price changes, quantity demanded doesnt change

Question 8

draw relatively inelastic demand

Answer 8

steeply sloped- google
-if price changes quantity demanded barely changes

Question 9

draw relatively elastic demand

Answer 9

shallow/ not steep slope
-as price changes, quantity demanded changes by more

Question 10

draw unitary demand

Answer 10

change in price is equal to change in demand

Question 11

what happens to the revenue produced by an inelastic good as price increases

Answer 11

revenue increases

Question 12

what happens to the revenue produced by an inelastic good as price decreases

Answer 12

revenue decreases

Question 13

what happens to the revenue produced by an elastic good as price increases

Answer 13

revenue decreases

Question 14

what happens to the revenue produced by an elastic good as price decreases

Answer 14

revenue increases

Question 15

what is income elasticity

Answer 15

the responsiveness of demand to a change in income
YED

Question 16

what is the formula of YED?

Answer 16

YED= (%change in demand)/(%change in income)

Question 17

what happens to demand of a normal good as income increases

Answer 17

demand increases
YED is positive

Question 18

what happens to demand of a inferior good as income increases

Answer 18

demand decreases
YED is negative

Question 19

what type of good has a YED of (1.3)

Answer 19

elastic as above 1
inferior as negative

Question 20

what type of good has a YED of 0.6

Answer 20

inelastic as below 1
normal as positive

Question 21

what is cross elasticity

Answer 21

responsiveness of demand of one good after a change in price of another good
XED

Question 22

what is the formula for XED

Answer 22

XED= (%change in quantity demanded of good A)/ (%change in price of good B)

Question 23

what type of correlation is it if XED= positive

Answer 23

substitute
-good As price increases, good Bs demand increases

Question 24

what type of correlation is it if XED= negative

Answer 24

compliment
good B price decreases
good A demand down

Question 25

what happens when XED=1

Answer 25

the products are perfectly close to each other
closer to1, the closer the products are