Week 7- Elasticities

Question 1

Price elasticity of demand:

Answer 1

the measurement of the change in quantity demanded (Qd) in relation to a change in its price

Question 2

Price elasticity of demand Equation

Answer 2

% change of quantity demanded / % change of price

Question 3

Elasticities rules

Less than 1 =
More than 1 =
Qual to 1 =

Answer 3

Less than 1 = inelastic
More than 1 = elastic
Qual to 1 = unit-elastic

*Since Qd usually decreases when price increases the price elasticity of demand is negative.

We use Absolute value to make interpretation easier (bigger the number = more elastic the goods demand is)

Question 4

Inelastic demand

If the price of my item doubles would you still buy it?
What determines inelastic vs elastic demand?

Answer 4

when price increases, the quantity demanded changes only a little (these are necessities)

Yes

Question 5

Elastic demand

If the price of my item doubles would you still buy it?
What determines inelastic vs elastic demand?

Answer 5

when price changes, the quantity demanded changes a lot. Has lots of substitutes. (not necessities, luxury items)

No

Question 6

Percentage change in quantity demanded Equation

Answer 6

Percentage change in quantity demanded = New value – old value / old value

Question 7

Percentage change in Price equation

Answer 7

Percentage change in Price = New value – old value / old value

Question 8

Draw an inelastic demand

Answer 8

The more vertical

Question 9

Draw an elastic demand

Answer 9

More horizontal

Question 10

Normal goods

Answer 10

demand increases when income increases, goods that are bought when your income rises

Question 11

Inferior goods

Answer 11

when income increases, demanded decreases, goods that we buy less of when our income goes up

Question 12

Income elasticity of demand

Quation

Answer 12

Measuresthe relationshp between the consumers income and the demand for a certain good

Income elasticity of demand = % of quantity demanded / % of income

Question 13

How do you tell if a good is a normal good or inferior good with the equation?

Answer 13

Normal goods: income elasticity of demand is +
* Income-elastic: income elasticity of demand is > 1 (luxury goods)
* Income-inelastic: income elasticity of demand is between 0 and 1 (necessities)

Inferior goods: income elasticity of demand is -

Question 14

Cross-price elasticity of demand equation

Answer 14

the way that changes in the price of one good can affect the quantity demanded of another good. This relationship can vary depending on whether the two goods are substitutes, complements, or unrelated to each other

Cross-price elasticity of demand = % in quantity demanded of good (item 1) / % in price change of good (item 2)

Question 15

Cross-price elasticity of demand

Answer 15

Measures responsiveness of Q_d of one good to the price change of a different good

Rules:
- If there’s a change in demand for a=a good because of a price change in the other they are substitutes.

Question 16

Cross-price elasticity of demand Used to identify substitutes and complements:

Answer 16

Substitute: cross-price elasticity > 0 (The larger the cross-price elasticity, the closer the substitute)

Complement: cross-price elasticity < 0

No relation: cross-price elasticity = 0

Question 17

Elasticity:

Answer 17

measures responsiveness of economic actors (Q_d, Q_s) to changes in market factors (price, income)

• How change in price of good/service affects demand for that good
• How change in price of good/service affects supply for that good
• How change in income will affect demand for a good
• How changes in price of good/service affect demand for related goods/services