Elasticity

Question 1

What is elasticity?

Answer 1

Measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants.

Question 2

What does price elasticity measure?

Answer 2

How much quantity demanded of a good responds to a change in the price of that good.

Question 3

What is the formula for percentage change?

Answer 3

% Change = (b-a) × 100/a

Question 4

What is the Midpoint Formula for percentage change?

Answer 4

Midpoint Formula % Change = (b-a) / (a + b/2)

Answer 5

1. Availability of Close Substitutes
2. Necessities vs. Luxuries
3. Definition of the market
4. Time horizon

Question 6

How does the availability of close substitutes affect demand elasticity?

Answer 6

Goods with close substitutes have more elastic demand.

Question 7

How do necessities and luxuries differ in terms of demand elasticity?

Answer 7

Necessities have inelastic demand, while luxuries have elastic demand.

Question 8

How does the definition of the market affect demand elasticity?

Answer 8

Narrowly defined markets have more elastic demand.

Question 9

How does the time horizon affect demand elasticity?

Answer 9

Demand is more elastic over longer time horizons.

Question 10

How is Price Elasticity of Demand computed?

Answer 10

Price Elasticity of Demand = % change in quantity demanded / % change in price

Use absolute value (drop the minus sign).

Question 11

What is the Midpoint Method for calculating Price Elasticity of Demand?

Answer 11

Price Elasticity of Demand = (Q2 - Q1) / [(Q2 + Q1) / 2] divided by (P2 - P1) / [(P2 + P1) / 2]

Question 12

What is the condition for demand to be elastic?

Answer 12

Price Elasticity of Demand > 1

Question 13

What is the condition for demand to be perfectly inelastic?

Answer 13

Price Elasticity of Demand = 0

Demand curve is vertical.

Question 14

What is the condition for demand to be inelastic?

Answer 14

Price Elasticity of Demand < 1

Question 15

What is the condition for demand to be perfectly elastic?

Answer 15

Price Elasticity of Demand = Infinity

Question 16

What is the condition for demand to be unit elastic?

Answer 16

Price Elasticity of Demand = 1

Demand curve is horizontal.

Question 17

What does a flatter demand curve indicate?

Answer 17

The greater the price elasticity of demand.

Question 18

What is Total Revenue (TR)?

Answer 18

Amount paid by buyers and received by sellers of a good

Price of the good X the quantity sold (PxQ).

Question 19

What happens to Total Revenue when demand is inelastic and price increases?

Answer 19

TR increases.

Question 20

What happens to Total Revenue when demand is elastic and price increases?

Answer 20

TR decreases.

Question 21

When demand is inelastic (elasticity < 1), how do price and TR move?

Answer 21

P and TR move in the same direction.

Question 22

When demand is elastic (elasticity > 1), how do price and TR move?

Answer 22

P and TR move in the opposite direction.

Question 23

What happens to Total Revenue when demand is unit elastic?

Answer 23

TR remains constant when the price changes.

Question 24

What are normal goods?

Answer 24

Normal goods have positive income elasticity and a constant slope.

Question 25

What characterizes necessities in terms of income elasticity?

Answer 25

Necessities have smaller income elasticities.

Question 26

What characterizes luxuries in terms of income elasticity?

Answer 26

Luxuries have large income elasticities.

Question 27

What indicates inelastic demand?

Answer 27

Points with low price and high quantity indicate inelastic demand.

Question 28

What indicates elastic demand?

Answer 28

Points with high price and low quantity indicate elastic demand.

Question 29

What are inferior goods?

Answer 29

Inferior goods have negative income elasticities.

Question 30

What is income elasticity of demand?

Answer 30

Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers' income.

Question 31

How is income elasticity of demand calculated?

Answer 31

It is calculated as the % change in quantity demanded divided by the % change in income.

Question 32

What is cross-price elasticity of demand?

Answer 32

Cross-price elasticity of demand measures how much the quantity demanded of one good responds to a change in the price of another good.

Question 33

How is cross-price elasticity of demand calculated?

Answer 33

It is calculated as the % change in quantity demanded of the first good divided by the % change in price of the second good.

Question 34

What are substitutes?

Answer 34

Substitutes are goods typically used in place of one another and have positive cross-price elasticity.

Question 35

What are complements?

Answer 35

Complements are goods typically used together and have negative cross-price elasticity.