Week 3 - Elasticity

Question 1

Elasticity and demand

Answer 1

• Elastic — absolute value of price elasticity > 1
• Inelastic — absolute value of price elasticity < 1

Question 2

Elasticity extremes

Answer 2

Perfectly elastic — Horizontal line
Perfectly inelastic — Vertical line

Question 3

Determinants of price elasticity of demand

Answer 3

1. More competing products means greater elasticity
2. Specific brands tend to have more elastic demand than categories
3. Necessities have less elastic demand
4. Consumer search makes demand more elastic
5. Demand gets more elastic over time

Question 4

Cross price elasticity of demand

Answer 4

% change in qty demanded / % change in price of smth else

Question 5

Cross price elasticity of demand and what it means

Answer 5

Positive — when 2 goods are substitutes
Negative — when 2 goods are complements
Near 0 — when 2 goods are independent

Question 6

Income elasticity of demand and what it means

Answer 6

Positive — for normal goods
Negative — for inferior goods

Question 7

Price elasticity of supply extremes

Answer 7

Perfectly elastic — supply curve horizontal
Perfectly inelastic — supply curve vertical

Question 8

5 Determinants of price elasticity of supply

Answer 8

1. Larger for firms who store inventories
2. Larger when inputs are easily available
3. Larger for firms w extra capacity
4. Larger when firms can easily enter/exit market
5. Larger when there’s more time to adjust