47: Interpreting price elasticity of demand

Question 1

perfectly inelastic

Answer 1

when the quantity demanded does not respond at all to changes in price

Question 2

shape of perfectly inelastic demand curve

Answer 2

vertical line

Question 3

perfectly elastic

Answer 3

when any price increase will cause the quantity demanded to drop to zero

Question 4

shape of perfectly elastic demand curve

Answer 4

horizontal line

Question 5

“elastic” Ep

Answer 5

when price elasticity of demand > 1

Question 6

“inelastic” Ep

Answer 6

when price elasticity of demand < 1

Question 7

unit elastic

Answer 7

when Ep = 1

Question 8

total revenue

Answer 8

total value of sales = price x quantity sold

Question 9

price effect of raising prices

Answer 9

after a price inc, each unit sold sells at a higher price, raising revenues

Question 10

price effect of lowering prices

Answer 10

after a price dec, each unit sold sells at a lower price, decreasing revenues

Question 11

quantity effect of raising prices

Answer 11

after a price inc, fewer units are sold decreasing revenue

Question 12

quantity effect of lowering prices

Answer 12

after price dec, more units are sold, raising revenues

Question 13

effects of price change at unit elasticity

Answer 13

raising or lowering prices does not change revenue

Question 14

effects of price change at “elastic” points

Answer 14

quantity effect is stronger: increasing prices decreases revenue, while decreasing prices raises revenue

Question 15

effects of price change at “inelastic” points

Answer 15

price effect is stronger: increasing prices increases revenue, while dec prices dec revenue

Question 16

determinants of price elasticity of demand (4)

Answer 16

1) whether close substitutes are available
2) whether a good is a necessity or a luxury
3) share of income spent on a good
4) time