PE (5) "Elasticity and Its Application"

Question 1

What is elasticity

Answer 1

Measure of the responsiveness of quantity demanded or quantity supplied

Question 2

What is price elasticity of demand

Answer 2

-How much the quantity demanded of a good responds to a change in the price of that good.
-Percentage change in quantity demanded divided by the percentage change in price.

Question 3

What is Elastic demand

Answer 3

Quantity demanded responds substantially (to a large degree) to changes in price.

Question 4

What is inelastic demand

Answer 4

Quantity demanded responds only slightly to changes in price.

Question 5

Determinants (something that controls or affects what happens in a particular situation) of price elasticity of demand

Answer 5

-Availability of close substitutes (to use something or someone instead of another thing or person)
. Goods will close substitutes: more elastic demand

-Necessities versus luxuries
. Necessities: inelastic demand
. Luxuries: elastic demand

-Definition of the market
. Narrowly defined markets: more elastic demand.

-Time horizon
. Demand is more elastic over longer time horizons.

Question 6

Computing the price elasticity of demand

Answer 6

-Percentage change in quantity demanded divided by percentage change in price

-Use absolute value (drop the minus sign)

Question 7

Midpoint method to calculate the price elasticity of demand

Answer 7

Two points: (Q1, P1) and (P2, Q2) (quantity and price)

Formula read in power point

Question 8

Variety of demand curves

Answer 8

-Demand is elastic
. Price elasticity of demand > 1

-Demand is inelastic
. Price elasticity of demand < 1

-Demand has unit elasticity
. Price elasticity of demand = 1

-Demand is perfectly inelastic
. Price elasticity of demand = 0
. Demand curve is vertical

-Demand is perfectly elastic
. Price elasticity of demand = infinity
. Demand curve is horizontal

Question 9

The flatter the demand curve

Answer 9

The greater the price elasticity of demand

Question 10

What is the Total Revenue (TR)

Answer 10

-Amount paid by buyers and received by sellers of a good

-Price of the good times the quantity sold (P x Q)

Question 11

For a price increase

Answer 11

-If demand is inelastic, TR increases

-If demand is elastic, TR decreases

Question 12

When demand is inelastic (elasticity < 1)

Answer 12

P and TR move in the same direction (if P increases, TR also increases)

Question 13

When demand is elastic (elasticity > 1)

Answer 13

P and TR move in opposite directions (if P increases, TR decreases)

Question 14

If demand is unit elastic (elasticity = 1)

Answer 14

Total revenue remains constant when the price changes

Question 15

Linear demand curve

Answer 15

-Constant slope
. Rise over run

-Different price elasticities
. Inelastic demand: points with low price and high quantity
. Elastic demand: points with high price and low quantity

Question 16

What is income elasticity of demand

Answer 16

-How much the quantity demanded of a good responds to a change in consumers’ income

-Percentage change in quantity demanded
. Divided by the percentage change in income.

Question 17

What are normal goods

Answer 17

-Positive income elasticity

-Necessities
. Smaller income elasticities

-Luxuries
. Large income elasticities

Question 18

What are inferior goods

Answer 18

-Negative income elasticities

Question 19

What is Cross-price elasticity of demand

Answer 19

-How much the quantity demanded of one good responds to a change in the price of another good

-Percentage change in quantity demanded of the first good
. Divided by the percentage change in price of the second good.

Question 20

What are substitutes

Answer 20

-Goods typically used in place of one another

-Positive cross-price elasticity

Question 21

What are complements

Answer 21

-Goods that are typically used together

-Negative cross-price elasticity

Question 22

What is price elasticity of supply

Answer 22

-How much the quantity supplied of a good responds to a change in the price of that good

-Percentage change in quantity supplied
. Divided by the percentage change in price

-Depends on the flexibility of sellers to change the amount of the good they produce

Question 23

What is elastic supply

Answer 23

quantity supplied responds substantially to changes in the price

Question 23

What is inelastic supply

Answer 23

Quantity supplied responds only slightly to changes in the price

Question 24

What is the determinant of price elasticity of supply

Answer 24

Time period (supply is more elastic in the long run)

Question 25

How to compute price elasticity of supply

Answer 25

-Percentage change in quantity supplied divided by percentage change in price

-Always positive

-Formula seen in power point

Question 26

Variety of supply curve

Answer 26

-Supply is unit elastic
. Price elasticity of supply = 1

-Supply is elastic
. Price elasticity > 1

-Supply is inelastic
. Price elasticity of supply < 1

-Supply is perfectly inelastic
. Price elasticity of supply = 0
. Supply curve is vertical

-Supply is perfectly elastic
. Price elasticity of supply = infinity
. Supply curve is horizontal

Question 27

What is the supply curve

Answer 27

-Different price elasticities
. Points with low price and low quantity
-Elastic supply
-Capacity for production not being used

. Points with high price and high quantity
-Inelastic supply