Chapter 4: Elasticity

Question 1

What does elasticity measure?

Answer 1

The “sensitivity” of one variable with respect to another

Used in economics to determine the responsiveness of a variable to shocks

Question 2

What determines elasticity?

Answer 2

The shape of the demand/supply curves

Question 3

What are five types of elasticity?

Answer 3

Own-price elasticity of demand (measures sensitivity of quantity demanded for X with respect to price of X)

Cross-price elasticity of demand (measures sensitivity of quantity demanded for X with respect to price of Y)

Income elasticity of demand (measures sensitivity of quantity demanded for X with respect to income)

Own-price elasticity of supply (measures sensitivity of quantity supplied of I with respect to price of I)

Elasticity of supply with respect to the price of labor (measures sensitivity of quantity supplied of I with respect to wage rate)

Question 4

Demand is said to be ______ when quantity demanded is very responsive to a change in the product’s own price

Answer 4

Elastic

Question 5

The more elastic demand is, the ____ the change in equilibrium price, and the _____ the change in equilibrium quantity resulting form any given shift in supply curve

Answer 5

Less
Greater

(flatter line)

Question 6

True/False? Elasticity is related to the slope of the demand curve because they are the same

Answer 6

False (they are related though)

Question 7

How is elasticity calculated?

Answer 7

n = (percentage change in quantity demanded)/(percentage change in price)
or
n = 1/slope X (Average price demanded/average quantity demanded)

Question 8

How is percentage change calculated?

Answer 8

eg %deltaQ = deltaQ/Qbar

Question 9

What happens when the demand elasticity is negative?

Answer 9

You take the absolute value

Question 10

Elasticity along a linear curve is more _____ when prices are high/demand is low and more _____ when prices are low and demand is high

Answer 10

Elastic

Inelastic

Question 11

Why does elasticity change along a straight line?

Answer 11

Because although the difference is the same between any two points the same distance away, the average price is getting greater and greater as you move along the x axis

Question 12

A vertical line on a price/quantity graph demonstrates perfectly _____ demand

Answer 12

Inelastic

Question 13

A horizontal line on a price/quantity graph demonstrates perfectly _____ demand

Answer 13

Elastic

Question 14

What happens during unit elastic demand?

Answer 14

A given % increase in price induces the same % decrease in Q at all points on the curve

Question 15

What determines elasticity? What is that determined by?

Answer 15

Availability of substitutes
Determined by
- how specifically the product is defined
- Whether the good is a necessity or luxury
- The length of the ‘run’ (short vs long)

Question 16

elasticity of Demand for a particular brand of juice is relatively _____ compared to the elasticity for all beverages

Answer 16

Elastic (if the price of minutemaid goes up you can find more OJ but if all OJs go up you’ll still buy minutemaid)

Question 17

Ceteris Paribus, luxuries exhibit ____ demands, while necessities exhibit ____ demands

Answer 17

Elastic

Inelastic

Question 18

Short run demand curves are characteristically ____

Answer 18

Inelastic

Question 19

Long run demand curves are characteristically _____

Answer 19

Elastic

Question 20

How is total expenditure calculated?

Answer 20

TE = P x Q

Question 21

When demand is elastic, Total expenditure ____ when price falls

Answer 21

Increases

Question 22

When demand is inelastic, Total expenditure _____ when price falls

Answer 22

Decreases

Question 23

When does total expenditure reach a maximum?

Answer 23

When demand is unit elastic

Question 24

If elasticity of supply is greater than one, supply is considered _____

If it is below one, it is _____

Answer 24

elastic

Inelastic

Question 25

What does the elasticity of supply depend on? What does that depend on?

Answer 25

How easily firms can increase output in response to an increase in price

Depends on technical ease of substitution in production and Time span under consideration

Question 26

What is an Excise tax? What does it do in terms of price paid and received?

Answer 26

A tax on the sale of a particular commodity

An excise tax raises price paid by consumer and reduces price received by producers

Question 27

What determines tax incidence (Who bears the burden of the tax)?

Answer 27

The relative elasticities of supply and demand

Question 28

True/False? The burden of an excise tax depends on who actually remits the tax to the government

Answer 28

False. It depends on the relative elasticities of demand and supply

Question 29

Who bears the tax burden if demand is more elastic than supply?

Answer 29

Consumers

Question 30

Who bears the tax burden if supply is more elastic than demand?

Answer 30

Producers

Question 31

True/False? Tax causes supply to shift

Answer 31

True

Question 32

How do you calculate the new equilibrium Ps and Q with tax?

Answer 32

P(c) = P(s) + T

Solve for Q, plug in to each of the equations for Price

Question 33

How do you calculate government revenue during taxation?

Answer 33

New equilibrium Q x tax

Tax = P(c) - P(s)

Question 34

Can income elasticity be negative?

Answer 34

Yes

Question 35

What happens if income elasticity is negative? If it’s positive?

Answer 35

Negative: Increase in income leads to decrease in demand (inferior good)

Positive: Increase in income leads to increase in demand (normal good)

Question 36

What happens if income elasticity is greater than 1? Below 1 (but above 0)?

Answer 36

n(y) > 1: luxury good

0 < n(y) < 1: necessary good

Question 37

How do you calculate income elasticity of demand?

Answer 37

n(y) = Percentage change in demanded quantity / percentage change in income

Question 38

How do you calculate cross elasticity of demand?

Answer 38

n(xy) = percentage change in demanded quantity of X / percentage change in price of Y

Question 39

What happens if cross elasticity of demand is greater than zero? If it’s below zero?

Answer 39

n(xy) > 0 : X and Y are substitutes

n(xy) < 0: X and Y are compliments