CHAPTER 6

Question 1

What is price elasticity of demand?

Answer 1

Measuring responsiveness (sensitivity) of consumers to price changes

It reflects how much the quantity demanded changes when the price changes.

Question 2

How is price elasticity of demand calculated?

Answer 2

Ed = %ΔQ / %ΔP

This is the formula used to determine the elasticity of demand.

Question 3

What does it mean if the price elasticity of demand is greater than 1?

Answer 3

Elastic demand

This indicates that the percentage change in quantity demanded is greater than the percentage change in price.

Question 4

What does it mean if the price elasticity of demand is less than 1?

Answer 4

Inelastic demand

This indicates that the percentage change in quantity demanded is less than the percentage change in price.

Question 5

What is unit elasticity?

Answer 5

Ed = 1

This means that the percentage change in quantity demanded is equal to the percentage change in price.

Question 6

What is the total revenue test?

Answer 6

Total revenue = Price (P) x Quantity demanded (Qd)

It helps to determine the effect of price changes on total revenue.

Question 7

What happens to total revenue when demand is elastic and price increases?

Answer 7

Total revenue decreases

This is because the percentage decrease in quantity demanded exceeds the percentage increase in price.

Question 8

What happens to total revenue when demand is inelastic and price increases?

Answer 8

Total revenue increases

This is because the percentage decrease in quantity demanded is less than the percentage increase in price.

Question 9

What is cross elasticity of demand?

Answer 9

Measures how sensitive consumer purchases of one product are to a change in the price of another product

It can indicate whether goods are substitutes or complements.

Question 10

What does a positive cross elasticity of demand indicate?

Answer 10

Substitute goods

This means that an increase in the price of one good leads to an increase in the quantity demanded of another good.

Question 11

What does a negative cross elasticity of demand indicate?

Answer 11

Complementary goods

This means that an increase in the price of one good leads to a decrease in the quantity demanded of another good.

Question 12

What is income elasticity of demand?

Answer 12

Measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good

It indicates whether a good is normal or inferior.

Question 13

What does a positive income elasticity of demand indicate?

Answer 13

Normal goods

This means that an increase in income leads to an increase in quantity demanded.

Question 14

What does a negative income elasticity of demand indicate?

Answer 14

Inferior goods

This means that an increase in income leads to a decrease in quantity demanded.

Question 15

What is the midpoint formula used for?

Answer 15

To calculate percentage changes in price and quantity

It provides a more accurate elasticity calculation.

Question 16

What is the relationship between price elasticity of supply and time?

Answer 16

The longer the time period, the greater the elasticity of supply

This is because producers have more time to adjust their supply.

Question 17

What is perfectly inelastic demand?

Answer 17

Ed = 0

This means that quantity demanded does not change regardless of price changes.

Question 18

What is perfectly elastic demand?

Answer 18

Ed = ∞

This means that any price increase will lead to zero quantity demanded.

Question 19

What factors determine price elasticity of demand?

Answer 19

• Substitutability
• Proportion of income
• Luxuries vs. necessities
• Time

These factors affect how consumers respond to price changes.

Question 20

What is the elasticity of demand when a product’s quantity demanded decreases from 6 to 3 when the price increases from R5 to R10?

Answer 20

Ed = 0.5 (Inelastic demand)

This indicates that the percentage change in quantity demanded is less than the percentage change in price.

Question 21

What does it mean when the price elasticity of supply is greater than 1?

Answer 21

Relatively elastic supply

This indicates that the percentage change in quantity supplied is greater than the percentage change in price.

Question 22

What does it mean when the price elasticity of supply is less than 1?

Answer 22

Relatively inelastic supply

This indicates that the percentage change in quantity supplied is less than the percentage change in price.

Question 23

What happens to the supply of antiques when demand increases?

Answer 23

Supply remains highly inelastic

This is because genuine antiques cannot be reproduced.

Question 24

What is the effect of high excise taxes on products with elastic demand?

Answer 24

Less tax revenue

Governments tend to target products with inelastic demand for higher taxes.

Question 25

What is the elasticity of demand for a holiday package if ed = 2?

Answer 25

Elastic demand ## Footnote This indicates a significant responsiveness of quantity demanded to price changes.

Question 26

Calculate the cross elasticity of demand if the price of CD players decreases from R750 to R400 and sales of CDs increase from 300 to 900.

Answer 26

Exy = -4.285 (Complementary) ## Footnote This indicates that the two products are complements.

Question 27

What is the impact on total revenue when demand is unit elastic?

Answer 27

Total revenue remains unchanged ## Footnote This indicates that changes in price do not affect total revenue.

Question 28

What is the relationship between price changes and total revenue for elastic demand?

Answer 28

Price increase leads to total revenue decrease ## Footnote This is due to the greater responsiveness of quantity demanded.