ELASTICITY

Question 1

Elasticity

Answer 1

Responsiveness of an economic variable to changes in another economic variable
ex. how much does quantity demanded change when price changes: depends on elasticity

Question 2

Quantity Demanded Less Responsive to change in Price

Answer 2

Inelastic
Demand curve is steep

Question 3

Quantity Demanded More responsive to change in price

Answer 3

Elastic
demand curve is more flat

Question 4

Price Elasticity of Demand

Answer 4

Measures responsiveness of quantity demanded of a good to a change in price
A Units Free Measurement

Question 5

EQUATION: Price Elasticity of Demand

Answer 5

% Change in Quantity demanded/ % Change in Price
=change in Quantity/ Q average=% Change in Q
=change in Price/ Price average = % Change in P

Question 6

Perfectly InElastic Demand

Answer 6

Quantity stays constant when price changes
Price Elasticity is 0

Question 7

Unit Elastic Demand

Answer 7

1

Question 8

InElastic Demand

Answer 8

Between 0-1
%change in quantity demanded<% change in Price

Question 9

Perfectly Elastic Demand

Answer 9

Quantity demanded changes by large % in response to tiny price change
Infinity

Question 10

Elastic Demand

Answer 10

Between 1 and Infinity
% change in quantity demanded > % change in price

Question 11

Perfect Substitutes

Answer 11

Perfectly Elastic
Can equally substitute 1 good for another

Question 12

Factors influencing Elasticity of Demand

Answer 12

Closeness of substitutes
-closer substitute = more elastic
Proportion of income spent on goods
-greater amt of income = more elastic
Time elapsed since the price change
-longer time elapsed = more elastic

Question 13

Total Revenue and Elastic Demand

Answer 13

1% price cut = > 1% Increased in Quantity Sold= Increased Revenue

Question 14

Total Revenue and InElastic Demand

Answer 14

1% price cut = <1% increase in quantity sold = Decreased revenue

Question 15

Total Revenue and Unit Elastic Demand

Answer 15

1% price cut = 1% increase in quantity sold
No change in Revenue

Question 16

Expenditure and Elastic Demand

Answer 16

1% price cut = Greater Expenditure
You Spend more on an item if the price falls

Question 17

Expenditure and InElastic Demand

Answer 17

1% price cut = quantity you buy is less than 1% = Decreased Expenditure
you spend less on an item when the price falls

Question 18

Expenditure and Unit Demand

Answer 18

1% price cut = 1% more quantity
No Change in Expenditure
you spend the same amount on an item when the price falls

Question 19

Income Elasticity of Demand

Answer 19

Responsiveness to Demand based on a change in INCOME

Question 20

EQUATION: Income Elasticity of Demand

Answer 20

% change in Quantity demanded/ % change in Income
Can be POSITIVE OR NEGATIVE

Question 21

Normal Good/ Income Elastic

Answer 21

Positive
>1%
Increases with Increased Income

Question 22

Normal Good/ Income InElastic

Answer 22

Positive
<1%
Decreases with Increased Income

Question 23

Inferior Good

Answer 23

Negative

Question 24

Cross Elasticity of Demand

Answer 24

responsiveness of demand for a good in relation to a change in price of a substitute or complement
Positive or Negative

Question 25

EQUATION: Cross Elasticity of Demand

Answer 25

% Change in Quantity Demanded/ % Change in price of substitute or complement

Question 26

Substitute

Answer 26

Positive
if a substitute for a good increases its price: demand for other good increases

Question 27

Complement

Answer 27

Negative
if a complement for a good increases its price: demand for the other good decreases

Question 28

Cross Elasticity & magnitude

Answer 28

Close Substitutes = Large Cross Elasticity
Close Complements= Large Cross Elasticity
Unrelated Items = Small Cross Elasticity

Question 29

Elasticity of Supply

Answer 29

Measures the responsiveness of the quantity supplied to a change in the price of a good

Question 30

EQUATION: ELASTICITY OF SUPPLY

Answer 30

% Change in Quantity supplied/ % Change in Price

Question 31

Elasticity of Supply is influenced by:

Answer 31

Resource substitution possibilities
Time Frame for Supply Decisions