Principles of Economics Chapter 5

Question 1

elasticity

Answer 1

A general concept used to quantify the response in one variable when another variable changes.

Question 2

elasticity of A wrt B =

Answer 2

%ΔA / %ΔB

Question 3

price elasticity of demand

Answer 3

The ratio of the percentage of change in quantity demanded to the percentage of change in price; measures the responsiveness of quantity demanded to changes in price.

Question 4

perfectly inelastic demand

Answer 4

Demand in which quantity demanded does not respond at all to a change in price.

Question 5

perfectly elastic demand

Answer 5

Demand in which quantity drops to zero at the slightest increase in price.

Question 6

elastic demand

Answer 6

A demand relationship in which the percentage change in quantity demanded is larger than the percentage change in price in absolute value (a demand elasticity with an absolute value greater than 1).

Question 7

inelastic demand

Answer 7

Demand that responds somewhat, but not a great deal, to changes in price. Inelastic demand always has a numerical value between zero and 1.

Question 8

unitary elasticity

Answer 8

A demand relationship in which the percentage change in quantity of a product demanded is the same as the percentage change in price in absolute value (a demand elasticity of 1).

Question 9

% change in quantity demanded =

Answer 9

(change in quantity demanded / Q1) x 100% = ((Q2 - Q1) / Q1) x 100%

Question 10

price of elasticity of demand =

Answer 10

% change in quantity demanded / % change in price

Question 11

midpoint formula

Answer 11

A more precise way of calculating percentages using the value halfway between P1 and P2
for the base in calculating the percentage change in price and the value halfway between Q1 and Q2 as the base for calculating the percentage change in quantity demanded.

Question 12

midpoint formula

Answer 12

% change in quantity demanded = (change in quantity demanded / Q1) x 100% = ((Q2-Q1) / Q1) x 100%

Question 13

point elasticity

Answer 13

A measure of elasticity that uses the slope measurement.
We have defined elasticity as the percentage change in quantity demanded divided by the percentage change in price.

Question 14

point elasticity

Answer 14

(ΔQ / Q1) / (ΔP / P1) = (ΔQ / ΔP) x (P1 / Q1)
note: (ΔQ / ΔP) reciprocal of slope

Question 15

total revenue (TR)

Answer 15

TR = P × Q
total revenue = price × quantity

Question 16

When price (P) declines,

Answer 16

quantity demanded (QD) increases. The two factors, P
and QD, move in opposite directions

Question 17

effects of price changes
on quantity demanded:

Answer 17

P inc –> Qd dec

&

P dec –> Qd inc

Question 18

effect of price increase on
a product with inelastic demand:

Answer 18

P inc x Qd dec = TR inc

Question 19

effect of price increase on
a product with elastic demand:

Answer 19

P inc x Qd dec = TR dec

Question 20

effect of price cut on a product with elastic demand:

Answer 20

P dec x Qd inc = TR inc

Question 21

effect of price cut on a product with inelastic demand:

Answer 21

P dec x Qd inc = TR dec

Question 22

the most obvious factor affecting demand elasticity is

Answer 22

the availability of
substitutes.

Question 23

When an item represents a relatively small part of our total budget,

Answer 23

we tend to
pay little attention to its price.

Question 24

The Time Dimension

Answer 24

The elasticity of demand in the short run may be very different from the elasticity of demand in the long run. In the longer run, demand is likely to become more elastic, or responsive, simply because households make adjustments over time and producers develop substitute goods.

Question 25

income elasticity of demand

Answer 25

A measure of the responsiveness of demand to changes in income.

Question 26

income elasticity of demand =

Answer 26

(% change in quantity demanded) / (% change in income)

Question 27

cross-price elasticity of demand

Answer 27

A measure of the response of the quantity of one good demanded to a change in the price of another good.

Question 28

cross- price elasticity of demand =

Answer 28

(% change in quantity in Y demanded) / (% change in price of X)

Question 29

elasticity of supply =

Answer 29

% change in quantity supplied / % change in price

Question 30

elasticity of labor supply

Answer 30

A measure of the response of labor supplied to a change in the price of labor.

Question 31

elasticity of labor supply =

Answer 31

(% change in quantity of labor supplied) / (% change in the wage rate)