Econ 101 - chp 4

Question 1

Define the price elasticity of demand

Answer 1

is a unis free measure of the responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus

a ratio of 2 percentage changes , measured in magnitude

Question 2

What’s the formula to calculating the price elasticity of demand and how to calculate?

Answer 2

price elasticity of demand = (% change in quantity demanded)/ (% change in price)

we express the change in price as a percentage of the average price (point between original and new point) and the change in the quantity demanded as a percentage of the average quantity.

we express this number in terms of magnitude and it is a proportionate change

percentage change in price = (change in price/average price) x 100%

Question 3

Why do we use the average price and quantity?

Answer 3

gives the most precise measurement of elasticity at the midpoint beween the original price + new price.

Question 4

Define perfectly inelastic demand

Answer 4

when the quantity demanded remains constant when the price changes - the price elasticity of demand is zero

Question 5

Define unit elastic demand

Answer 5

when the percentage change in the quantity demanded equals the percentage change int eh price - price elasticity of demand is 1.

Question 6

Define inelastic demand

Answer 6

where price elasticity of demand is between zero and 1 - the % change in quantity demanded is less than the % change in the price

e.g. food + housing

Question 7

define perfectly elastic demand

Answer 7

when the quantity demanded changes but an infinitely large percentage in response to a tiny price change - price elasticity of demand is infinity

the demand for a good that has a perfect substitute is perfectly elastic

e.g. soft drink

Question 8

Define elastic demand

Answer 8

The price elasticity of demand is greater than 1

the percentage change in the quantity demanded exceed the percentage change in price

Question 9

factors of elasticity of demand for a good

Answer 9

1. closeness of substitutes
2. proportion of income spend on the good
3. time elapsed since the price change

Question 10

How does the closeness of substitutes affect the elasticity of demand

Answer 10

the closer the substitutes for a good, the more elastic is the demand or it.

the degree of substitutability depends on how narrowly we define a good

luxury usually has many substitutes (elastic demand)

necessity (inelastic demand)

Question 11

How does the proportion of income spend on the good affect elasticity of demand for a good?

Answer 11

ceteris paribus, the greater the proportion of income spent on a good the more elastic is the demand for it.

smaller proportion of your budget, that you barely notice the change so the demand is more inelastic

Question 12

How doe sthe time elapsed since price change affect the elasticity for demand?

Answer 12

the longer the time that has elapsed since a price change, the more elastic is the demand.

time gives more substitutes developed, allowing the consumers to change their preferences and their demand

Question 13

Is the elasticity of demand the same as the slope? why?

Answer 13

no - at the midpoint, the elasticity of demand is unit elastic while points above the midpoint are elastic and points below the midpoint are inelastic

Question 14

Define the total revenue test

Answer 14

a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, ceteris paribus

Question 15

if a price cut increases the total revenue that means the elasticity fo demand is

Answer 15

elastic

Question 16

if a price cut decreases total revenue that means the elasticity of the demand is

Answer 16

inelastic

Question 17

if a price cut leaves total revenue unchanged, that means the elasticity of demand is

Answer 17

unit elastic

Question 18

What’s the relationship between unit elastic and total revenue?

Answer 18

the point at which there is unit elasticity (demand) it where total revenue for a good is maximized.

Question 19

define the income elasticity of demand and give the formula

Answer 19

a measure of the responsiveness of the demand for a good or service to a change in income

income elasticity of demand = (%change in Qd)/(%change in income)

Question 20

What are the ranges of income elasticities of demand

Answer 20

1. positive and greater than 1 - normal good, income elastic)
2. Positive and less than 1 (normal good, income inelastic)
3. negative (inferior good)

Question 21

What are the implications of a good that has income inelastic demand vs elastic demand

Answer 21

inelastic - implication for the percentage of income spent on the goo d- percentage of income spent on that good decreases as income increases

elastic - percentage of income spent on the good increases as income increases

Question 22

Define cross elasticity of demand and the formula for it

Answer 22

a measure of the responsiveness of the demand for a good to a change in the price of a substitute or a complement, ceteris paribus.

cross elasticity of demand - (%change in Qd)/(%change in price of a substitute or complement)

Question 23

What’s the relationship between inferior goods + income elasticity of demand

Answer 23

negative relationship - quantity demanded and amount spent on it of an inferior decreases when income increases

Question 24

What does it mean for the results of cross elasticity of demand?

Answer 24

if it’s negative, demand and the price of the other good change in opposite directions, so the two goods are complements

if it’s positive, the demand and the price of the other good change in the same direction so the two goods are substitutes

Question 25

If 2 items are close substitutes that means the cross elasticity is

Answer 25

large

Question 26

if 2 items are close complements, the cross elasticity is

Answer 26

large

Question 27

if the 2 items are somewhat unrelated to each other, the elasticity is

Answer 27

small (perhaps 0)

Question 28

Define the elasticity of supply and give the formula

Answer 28

measure the responsiveness of the quantity supplied to a change in the price of a good, ceteris paribus. elasticity of supply = (%change in Qs)/(%change in price)

Question 29

what are the different types of the elasticity of supply?

Answer 29

when elasticity of supply = 0 it's referred as perfectly inelastic supply when elasticity of supply = 1, it's referred to as a unit elastic supply when elasticity of supply = infinity, it's referred to as perfectly elastic supply When elasticity of supply > 1, the supply is elastic when elasticity of supply < 1, the supply is inelastic

Question 30

What are the factors that influence the elasticity of supply

Answer 30

1. resource substitution possibilities 2. time frame for the supply decision

Question 31

How does resource substitution possibilities affect the elasticity of supply?

Answer 31

goods or services that can be produced using only unique or rare productive resources have low, elasticity of supply. goods or services that can be produced using commonly available resources that could be allocated to a wide variety of alternative tasks have high elasticity of supply.

Question 32

Where do most goods + services lie in the elasticity of supply

Answer 32

between 0 to infinity. means that quantity can be increased but only by incurring a higher cost - if a higher price is offered the quantity supplied increases

Question 33

What are the 3 time frames of supply - to study the influence of the amount of time elapsed since a price change

Answer 33

1. momentary supply 2. short-run supply 3. long-run supply

Question 34

what does momentary supply determine?

Answer 34

when the price of a good changes, the immediate response of the quantity supplied is determined by the momentary supply of that good

Question 35

What does short-run supply determine?

Answer 35

the response of the quantity supplied to a price change when only some of the possible adjustments to production can be made is determined by short-run supply

Question 36

What does the long-run supply determine?

Answer 36

The response of the quantity supplied to a price price change after all he technologically possible ways of adjusting supply have been exploited is determined by long-run supply.

Question 37

What is the elasticity of most good + services for their long-term supply

Answer 37

most goods + services have an elastic long-run supply

Question 38

What is the elasticity of most good + services for their short-term supply

Answer 38

most goods + services have an inelastic short-run supply

Question 39

What is the elasticity of some good + services for their momentary supply

Answer 39

some are inelastic (inventory of fruits at a grocery store some are elastic (long-distance phone calls)