Week 3 - Elasticity: The Responsiveness of Demand and Supply

Question 1

What is elasticity?

Answer 1

A measure of how much one economic variable – such as the quantity demanded of a product – responds to changes in another economic variable such as the product’s price.

Question 2

What is price elasticity of demand?

Answer 2

The responsiveness of the quantity demanded of a good to a change in its price.

Question 3

How is price elasticity of demand measured?

Answer 3

Measured by dividing the percentage change in quantity demanded of product by the percentage change in the product’s price.

Question 4

If the price elasticity of demand is greater than 1, demand is…

Answer 4

Elastic (PED > 1).

Question 5

If the price elasticity of demand equals 1, demand is…

Answer 5

Unit elastic (PED = 1).

Question 6

If the price elasticity of demand is less than 1, demand is…

Answer 6

Inelastic (PED < 1).

Question 7

What is elastic demand?

Answer 7

Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price.
- If prices have changed by 10% and the quantity demand has changed by 20% then PED = 20%/10% = 2 (elastic).

Question 8

What is inelastic demand?

Answer 8

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price.
- If prices have changed by 20% and the quantity demand has changed by 10% then PED = 10%/20% = 0.5 (inelastic).

Question 9

What is unit-elastic demand?

Answer 9

Demand is unit-elastic when the percentage change in quantity demanded is equal to the percentage change in price.
- If prices have changed by 10% and the quantity demand has changed by 10% then PED = 10%/10% = 1 (unit elastic).

Question 10

What is perfectly inelastic demand?

Answer 10

Demand is perfectly inelastic when a change in price results in no change in quantity demanded.
- Perfectly inelastic Ed = 0.

Question 11

What is perfectly elastic demand?

Answer 11

Demand is perfectly elastic when a change in price results in an infinite change in quantity demanded.
- Perfectly elastic Ed = infinite

Question 12

What are the determinants of the price elasticity of demand?

Answer 12

Availability of close substitutes, luxuries vs necessities, definition of the market, the length of time involved, share of expenditure on the good in the consumer’s budget.

Question 13

If there are lots of substitutes / easy to find, is it elastic or inelastic?

Answer 13

Elastic.

Question 14

If there are few substitutes / difficult to find, is it elastic or inelastic?

Answer 14

Inelastic.

Question 15

If the good is a luxury, is it elastic or inelastic?

Answer 15

Elastic.

Question 16

If the good is a necessity, is it elastic or inelastic?

Answer 16

Inelastic.

Question 17

If a big portion of income is spent on it, is it elastic or inelastic?

Answer 17

Elastic.

Question 18

If a small portion of income is spent on it, is it elastic or inelastic?

Answer 18

Inelastic.

Question 19

If it is narrowly defined (down to 1 brand or type) is it elastic or inelastic?

Answer 19

Elastic.

Question 20

If it is broadly defined, is it elastic or inelastic?

Answer 20

Inelastic.

Question 21

If there has been a long time period since price change, is it elastic or inelastic?

Answer 21

Elastic.

Question 22

If there has been a short time since price change, is it elastic or inelastic?

Answer 22

Inelastic.

Question 23

What is total revenue?

Answer 23

Total revenue is the total amount of funds received by a seller of a good or service.

Question 24

How is total revenue calculated?

Answer 24

TR = price x quantity demanded

Question 25

What is the total revenue test?

Answer 25

A method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change.

Question 26

If demand is elastic, then an increase in price ______ revenue because the decrease in quantity demanded is proportionally greater than the increase in price.

Answer 26

If demand is elastic, then an increase in price reduces revenue because the decrease in quantity demanded is proportionally greater than the increase in price.

Question 27

If demand is elastic, then a decrease in price ______ revenue because the increase in quantity demanded is proportionally greater than the decrease in price.

Answer 27

If demand is elastic, then a decrease in price increases revenue because the increase in quantity demanded is proportionally greater than the decrease in price.

Question 28

If demand is inelastic, then an increase in price ______ revenue because the decrease in quantity demanded is proportionally smaller than the increase in price.

Answer 28

If demand is inelastic, then an increase in price increases revenue because the decrease in quantity demanded is proportionally smaller than the increase in price.

Question 29

If demand is inelastic, then a decrease in price reduces revenue because the increase in quantity demanded is proportionally smaller than the decrease in price.

Answer 29

If demand is inelastic, then a decrease in price ______ revenue because the increase in quantity demanded is proportionally smaller than the decrease in price.

Question 30

If demand is unit-elastic, then an increase in price ______ revenue because the decrease in quantity demanded is proportionally the same as the increase in price.

Answer 30

If demand is unit-elastic, then an increase in price does not affect revenue because the decrease in quantity demanded is proportionally the same as the increase in price.

Question 31

If demand is unit-elastic, then a decrease in price ______ revenue because the increase in quantity demanded is proportionally the same as the decrease in price.

Answer 31

If demand is unit-elastic, then a decrease in price does not affect revenue because the increase in quantity demanded is proportionally the same as the decrease in price.