Unit 1 - Elasticity

Question 1

price elasticity of demand

Answer 1

% change in Qd/% change in P

Question 2

Why is elasticity always negative?

Answer 2

% change in Qd is the opp. sign (-) of % change in P: Elasticity -

Question 3

elasticity of demand

Answer 3

how revenues change when a change in P –> change in Qd

Question 4

revenues

Answer 4

P x Q ($ directed by firm from selling its good)

Question 5

perfectly inelastic D curve

Answer 5

no effect of price increase on Q, revenues increase (big), # range (0)

insensitive to price *essential goods (i.e. meds)

fully vertical line

Question 6

inelastic D curve

Answer 6

able to reduce D a little

small effect of price increase on Q

revenues increase (medium)

range: 0 to -1

negative sloping curve

Question 7

unitary elastic D curve

Answer 7

P increase causes a medium decrease in Q

revenues: no change

range: -1

Question 8

elastic D curve

Answer 8

P increase causes a large decrease in Q

revenues decrease

range: < -1

Question 9

perfectly elastic D curve

Answer 9

P increase causes Q to go to 0

revenues goes to 0

range: infinity

fully horizontal graph

Question 10

revenue

Answer 10

P+Q

Question 11

elastic determinants

Answer 11

luxury, substitute, big % of income, long run

Question 12

inelastic determinants

Answer 12

necessity, no/few substitutes, small % of income (i.e. toothpaste), short run

Question 13

price elasticity of demand

Answer 13

% change in Qd/% change in P

Question 14

perfectly elastic

Answer 14

elasticity = 0 (Q = no change), perfectly vertical graph

Question 15

inelastic

Answer 15

between 0 and -1 (i.e. -0.5), negative slope

Question 16

elastic

Answer 16

less than -1 (i.e. -3), relatively steeper negative slope

Question 17

elasticity of supply

Answer 17

% change in Qs/% change in P

positive #

Question 18

perfectly inelastic

Answer 18

no change in Qs when P increases, # range: 0, fully vertical

Question 19

inelastic

Answer 19

small increase in Qs, 0 to 1 # range

Question 20

unitary elastic

Answer 20

medium increase in Qs, # range: 1

Question 21

elastic

Answer 21

large increase in Qs due to P increase, # range: >1

Question 22

perfectly elastic

Answer 22

P increase causes Qs change to infinity, nearly horizontal

Question 23

determinants of inealsticity

Answer 23

time frame, substitutes in production

Question 24

time frame

Answer 24

at market (price increases)
short run: period of time when some input (factor of production) is at equilibrium

Question 25

income elasticity of demand

Answer 25

% change in Qd/% change in income

Question 26

income elasticity of demand for inferior goods

Answer 26

-/+
<0 (i.e. bus tokens)

Question 27

income elasticity of normal goods

Answer 27

+/+ (most goods)
also includes necessity and luxury goods

Question 28

income elasticity of necessity

Answer 28

<1 (double income –> doubling Qd)

Question 29

cross-price elasticity of demand

Answer 29

% change in Qd of good A/% change in Qd of good B

Question 30

substitutes in consumption’s cross-price elasticity

Answer 30

i.e. cars (Good B) & bikes (good A)
increase P of good B, decrease Qd of cars, increase Qd of bikes

Question 31

consumer surplus (CS)

Answer 31

distance between consumers’ max willingness to pay - market price. measures gains from trade

Question 32

how to read a CS graph?

Answer 32

willingness to pay read off D curve

Question 33

producer surplus (PS)

Answer 33

market price - minimum price
producer would accept
measures gains from trade
not the same as profit

Question 34

market price

Answer 34

producer indifferent about producing this unit (no extra supplies)

Question 35

price ceiling

Answer 35

max P set by government

Question 36

non-binding ceiling

Answer 36

set it too high to affect market

Question 37

other non-market price effects

Answer 37

D for substitutes increases (b/c shortage)

lines

black market sales (get higher prices)

decrease in product quality

increase/decrease D for complements

Question 38

who wins/loses with price controls?

Answer 38

producers worse off, depends for consumers

Question 39

price floor

Answer 39

minimum P set by gov’t

can be binding or non-binding (does not equate to effect on market)

Question 40

other non-market effects

Answer 40

increase D substitutes/complements in consumption

black market sales (at lower prices)

Question 41

Deadweight loss

Answer 41

higher social surplus at Qeqm than Qqlow is lost gains from trade

higher social surplus at Qeqm than Qhigh reflects waste of resources