Chapter 5

Question 0

Price elasticity of demand

Answer 0

Measures how much the quantity demanded responds to a change in price
Elastic- quantity demanded responds substantially to changes in price
Inelastic- responds only slightly to changes in price

PED = %change in QD/ %change in price

Question 1

Elasticity

Answer 1

Measures how much consumers respond to changes in different variables

Question 2

What influences price elasticity of demand

Answer 2

1. Availability of close substitutes (close substitutes = more elastic demand)
2. Necessities vs luxuries
3. Definition of the market (narrowly defined markets have more elastic demands bc easier to find close substitutes)
4. Time horizon (goods more elastic over time)

Question 3

Elasticity of demand curves

Answer 3

Elasticity > 1 = elastic
Elasticity < 1 = Inelastic
Elasticity = 1 is unit elastic (unitary)

Flatter demand curve = greater PED
Steeper demand curve = smaller PED

Question 4

Perfectly Inelastic demand

Answer 4

Zero elasticity; demand curve is vertical

Question 5

Perfectly elastic

Answer 5

PED approaches infinity; demand curve is horizontal

Question 6

Total revenue

Answer 6

Amount paid by buyers and received by sellers for a good

Price x Quantity

Question 7

Impact of price change on total revenue depends on…

Answer 7

Elasticity of demand. If demand is…
Elastic: increase in price causes decrease in total revenue (P⬆️TR⬇️ P⬇️TR⬆️)
Inelastic: price and TR move in same direction (P⬆️TR⬆️ P⬇️TR⬇️)
Unit elastic: TR remains constant when price changes

Question 8

Elasticity of a linear demand curve

Answer 8

Slope of linear demand curve is constant but elasticity is not:
Points of low price and high quantity- demand curve Inelastic
Points of high price and low quantity- demand curve is elastic

Question 9

Income elasticity of demand

Answer 9

Measures how quantity demanded changes as consumer income changes

IED = %change in QD/ % change in income

Question 10

Elasticity of normal vs inferior goods

Answer 10

Bc QD and income move in same direction,
Normal goods: + income elasticities
Inferior goods: - elasticities

Necessities usually have small income elasticities bc they are still demanded at low income

Question 11

Cross-price elasticity of demand

Answer 11

Measures how the QD of one good responds to change in price of another

CPED = %change in QD of good 1/ %change in price of good 2

Substitutes: +
Complements: -

Question 12

Price elasticity of supply

Answer 12

Measures how much QS responds to changes in price
PES = %change in QS/ %change in price

ES > 1 = elastic
ES < 1 = Inelastic
ES = 0 perfectly Inelastic

Key determinant: time period (supply is more elastic in the long run)