Week 3 - elasticity

Question 1

define elasticity

Answer 1

Elasticity = A measure of responsiveness of quantity demanded or quantity supplied to one of it’s determinates

Question 2

Define price elasticity of demand

Answer 2

Price elasticity of demand = A measure of how much the quantity demanded of a good responds to a change in the price of that good, calculated as a percentage

Price elasticity of demand = % change in quantity demanded / %change in price

Question 3

price elasticity of demand formala

Answer 3

Price elasticity of demand = % change in quantity demanded / %change in price

The midpoint formula is preferable when calculating the price elasticity of demand because it gives the same answer regardless of the direction of the change.
(Q2 – Q1)/[(Q2 + Q1)/2] Price elasticity of demand = (P2 – P1)/[(P2 + P1)/2]
page 99

Question 4

Price elasticty of demand determinants

Answer 4

1. Availability of close substitutes (many goods = elastic)
2. Necessities V luxuries (necessities = inelastic demand, luxury = elastic)
3. Definition of the market – ‘how we draw the boundaries of the market’ board category = inelastic demand, narrow category (many close substitutes) = elastic demand / Wide market = less elastic
4. Time horizon = longer time = more elastic = short term = inelastic

Question 5

Define total revenue

Answer 5

The amount paid by buyers and received by sellers of a good calculated as the price of the good X quantity sold
•
With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller. Thus, total revenue increases.

TR = P x Q

Question 6

type of demand curves

Answer 6

elastic
inelastic
unit elastic
perfectly elastic
perfectly inelastic

Question 7

Define elastic curves

Answer 7

When the elasticity is greater than 1, therefore quantity moves proportionally more than price (quantity demanded does respond strongly to a change in price)

Question 8

define inelastic demand curve

Answer 8

When elasticity is less than 1 therefore, quantity moves proportionally less than price (Quantity demanded does not respond strongly to a change in price)

Question 9

explain unit elastic demand curve

Answer 9

If elasticity is exactly 1 the percentage change in quantity equals the percentage change in price, this is called Unit elasticity

Question 10

Explain perfectly inelastic demand curve

Answer 10

Perfect inelastic = quantity demanded does not respond to a change in price (demand curve is vertical)

Question 11

Explain perfectly elastic demand curve

Answer 11

Perfectly elastic = occurs when price elasticity of demand approaches infinity and the demand curve becomes horizontal, reflecting the fact that a very small change in price will lead to large changes in quantity demanded

Question 12

Define income elasticity of demand and it’s formula

Answer 12

Income elasticity of demand = Measure of how much the quantity demand of a good responds to a change in consumer income, calculated as a percentage change in quantity demanded divided by percentage change of income

%change in quantity demand / %change in income

Types of goods:
Normal goods
Inferior goods
o Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods. (look at slide 66 week 3*)

Question 13

Define cross price elasticity of demand

Answer 13

A measure of how much quantity demanded of one good responds to a change in price of another good.
Calculated: %change in quantity of good 1 / % change in price of good 2

Question 14

Define elasticity of supply

Answer 14

A measure of how much the quantity supplied of a good responds to a change in the price of that good.

Question 15

Elasticity of supply formula

Answer 15

Price elasticity of supply = %change in quantity supplied / % change in price

Question 16

Determinates of elasticity of supply

Answer 16

Ability of sellers to change the amount of the good they produce.
– Beach‐front land is inelastic.
– Books, cars, or manufactured goods are elastic.
• Time period – Supply is more elastic in the long run

Question 17

explain income elasticity of demand and goods

Answer 17

Higher income raises quantity demanded, because quantity demanded and income move in the same direction, normal goods have POSITIVE income elasiticites

inferior goods have Negative income elasticities

Question 18

Cross price elasticity of demand formula

Answer 18

%chnage in QUANTITY of good 1 / % change in PRICE of good 2

substitutes will likely be Positive

Complements will be negative (page 104)

Question 19

Look at tax slides and tax revenue

Answer 19

:))