CH5: Elasticity

Question 1

What is elasticity in economics?

Answer 1

Elasticity measures the sensitivity of one economic variable to a change in another, such as how demand responds to price changes.

Question 2

What does the elasticity formula represent?

Answer 2

Elasticity = % change in dependent variable / % change in independent variable.

Question 3

What is price elasticity of demand?

Answer 3

It measures the percentage change in quantity demanded when the price changes by 1%, ceteris paribus.

Question 4

How is price elasticity of demand calculated?

Answer 4

ep = (% change in quantity demanded) / (% change in price).

Question 5

Give an example of price elasticity calculation.

Answer 5

If price changes by 5% and quantity demanded changes by 10%, ep = 10% / 5% = 2.

Question 6

What does ep > 1 imply?

Answer 6

Demand is elastic – quantity demanded changes more than price.

Question 7

What does ep = 1 imply?

Answer 7

Demand is unit elastic – quantity and price change proportionally.

Question 8

What does ep < 1 imply?

Answer 8

Demand is inelastic – quantity changes less than price.

Question 9

What is the impact of a steeper demand curve on elasticity?

Answer 9

A steeper demand curve means less responsive demand and greater price changes.

Question 10

What is arc elasticity?

Answer 10

It calculates elasticity over a range using the average of starting and ending prices and quantities.

Question 11

What is point elasticity?

Answer 11

Elasticity calculated at a specific point on the demand curve.

Question 12

What is the formula for arc elasticity?

Answer 12

ep = ((Q2 - Q1) / (Q1 + Q2)) / ((P2 - P1) / (P1 + P2)).

Question 13

What is total revenue?

Answer 13

Total Revenue (TR) = Price (P) × Quantity (Q).

Question 14

How does elastic demand affect total revenue?

Answer 14

If demand is elastic, a price decrease increases total revenue.

Question 15

How does inelastic demand affect total revenue?

Answer 15

If demand is inelastic, a price increase increases total revenue.

Question 16

What is perfectly inelastic demand?

Answer 16

ep = 0 – Quantity demanded does not change regardless of price.

Question 17

What is the shape of a perfectly inelastic demand curve?

Answer 17

Vertical line – quantity remains constant despite price changes.

Question 18

What is inelastic demand?

Answer 18

ep < 1 – Quantity demanded changes less than proportionately to price.

Question 19

What is unitary elasticity?

Answer 19

ep = 1 – Quantity and price change in equal proportions.

Question 20

What is the shape of a unitarily elastic demand curve?

Answer 20

Rectangular hyperbola (not a straight line).

Question 21

Concept

Answer 21

Explanation

Question 22

Elastic Demand

Answer 22

A price change leads to a proportionally greater change in quantity demanded (elasticity > 1). Lowering price increases total revenue.

Question 23

Perfectly Elastic Demand

Answer 23

Elasticity coefficient is infinity. Consumers will buy any quantity at a certain price, but quantity demanded drops to zero if price increases.

Question 24

Substitution Possibilities

Answer 24

More and better substitutes increase the price elasticity of demand.

Question 25

Complementary Goods

Answer 25

Highly complementary goods tend to have inelastic demand.

Question 26

Type of Want

Answer 26

Necessities (basic goods) have inelastic demand; luxuries have elastic demand.

Question 27

Time Period

Answer 27

Demand tends to be more elastic in the long run as consumers adjust.

Question 28

Income Elasticity of Demand

Answer 28

Measures responsiveness of quantity demanded to income changes. Positive for normal goods, negative for inferior goods.

Question 29

Normal Good

Answer 29

Quantity demanded increases as income increases (positive income elasticity).

Question 30

Inferior Good

Answer 30

Quantity demanded decreases as income increases (negative income elasticity).

Question 31

Luxury Good

Answer 31

Normal good with income elasticity > 1.

Question 32

Essential Good

Answer 32

Normal good with income elasticity between 0 and 1.

Question 33

Cross Elasticity of Demand

Answer 33

Measures responsiveness of quantity demanded of one good to price change in another.

Question 34

Substitute Goods (Cross Elasticity)

Answer 34

Positive cross elasticity – increase in price of one increases demand for the other.

Question 35

Complementary Goods (Cross Elasticity)

Answer 35

Negative cross elasticity – increase in price of one decreases demand for the other.

Question 36

Price Elasticity of Supply

Answer 36

Measures responsiveness of quantity supplied to price changes.

Question 37

Perfectly Inelastic Supply

Answer 37

es = 0. Quantity supplied does not change with price.

Question 38

Inelastic Supply

Answer 38

es > 0 but < 1. Quantity supplied changes less than proportionately to price.

Question 39

Unitarily Elastic Supply

Answer 39

es = 1. Quantity supplied changes proportionately to price.

Question 40

Elastic Supply

Answer 40

es > 1. Quantity supplied changes more than proportionately to price.

Question 41

Perfectly Elastic Supply

Answer 41

es = ∞. Any quantity supplied at a given price.