Topic 3

Question 1

Define elasticity and write the formula

Answer 1

elasticity of demand measures the percentage change in quantity demanded for each 1% change in price

Question 2

Explain elastic demand

Answer 2

Ed> 1
Consumers are very response to price changes
% changes in quantity > % changes in price

Question 3

Explain inelastic demand

Answer 3

Ed <1
Consumers are not very responsive to changes in price
% change in quantity demand < % change in price

Question 4

explain perfectly elastic demand, perfectly inelastic demand and unit elastic demand

Answer 4

perfectly elastic (Ed=infinity). 
demand curve is horizontal

perfectly inelastic (ed =0) 
vertical

%change in Q = %change in P (Ed=1)

Question 5

write out the 2 formulas

Answer 5

poo

Question 6

what are the 5 determinants of elasticity of demand

Answer 6

1. availability of close substitutes
2. time
3. necessities vs luxuries
4. definition of market (broad vs precise)
5. share of budget spent on good

Question 7

what is the relationship between elasticity and total revenue (formula and what happens when price changes)

Answer 7

TR = PQ
elastic demand: price increase causes a large loss from lower quantity of sales than the added revenue per unit sold (TR falls)

inelastic demand: price increase causes a smaller loss than the added revenue per unit sold (TR rises)

unit elastic: no effect on TR as gain and loss are equal

Question 8

define income elasticity of demand

Answer 8

how sensitive demand is to changes in income

Question 9

explain teh relationship between income elasticity and 1. inferior goods 2. normal goods 3. luxury goods

Answer 9

1. Inferior: Ei<0 - neg relationship (homebrand)

2. normal 01 -pos relationship (very reponsive)

Question 10

define cross elasticity of demand and write formula

Answer 10

how quantity demanded for one good responds to a change sin the price of another related goods

Question 11

explain the relationship between elasticity and 1. substitute good prices and 2. compliment goods prices

Answer 11

1. substitute (Ex>0): pos relationship - price of B and quantity demand of A
2. compliment goods (Ex<0): neg relationship- rice of B and quantity demanded of A

Question 12

define price elasticity of supply and write formula

Answer 12

measures how quantity supplied responds to changes in price

Question 13

explain perfectly inelastic supply

Answer 13

Es = 0. quantity supplied is the same regardless of price (eg picasso painting has finite supply)

Question 14

explain perfectly elastic and unit elastic supply

Answer 14

perf elas (Es = Infinity): suppliers only supply at given price (eg production of digital goods/software costing nothing to replicate) - MC = neg)

unit elastic (Es = 1) price increase = quantity increase

Question 15

what are the 2 determinants of price elasticity of supply

Answer 15

1. time: more time = more change to change production quantity = more elastic supply will be
2. cost of inputs: cheap input s = elastic supply.