elasticity

Question 1

elastic vs inelastic demand

Answer 1

elastic–> when increase in price reduces demand a lot
inelastic–> increase in price reduced demand a little.

Question 2

describe the elasticity rule

Answer 2

• if demand and supply run through a common point–> at any quantity curve that is flatter is more elastic

Question 3

how to measure elasticity

Answer 3

Price elasticity of demand = the
percentage change in quantity demanded
divided by the percentage change in
price.

Question 4

interpreting elasticity of demand

Answer 4

If the |Ed| < 1, the demand curve is inelastic.
If the |Ed| > 1, the demand curve is elastic.
If the |Ed| = 1, the demand curve is unit elastic

Question 5

extremely low elasticity of demand

Answer 5

price elasticity of demand = 0

Question 6

high price elasticity of demand

Answer 6

price elasyicity of demand= infiniity

Question 7

unit eleasticity of demand

Answer 7

=1

Question 8

inelastic demand

Answer 8

=0.5 (less than 1)

Question 9

elastic demand

Answer 9

2 (more than 1)

Question 10

The midpoint method

Answer 10

%change in X= change in X/Average value of X x 100

Average value of X= starting value of X+ Final Value of X/2

Question 11

Total revenue formula

Answer 11

TR= PxQ

Question 12

relationship of elasticity and TR

Answer 12

when demand is inelastic–> price effect dominates quantity effect
an increase in price only causes a slight reduction in quantity demanded.
TR will rise when price rises

Question 13

relationship of elasticity and TR

Answer 13

when demand is elastic–> quantity effect dominates price effect.
increase i price will cause significant reduction in the quantity demanded
TR will decreaases when price rises

Question 14

relationship of elasticity and TR

Answer 14

demand is unit elastic–> quantity effect equals price effect.
- increase in price balances the reduction in quantitiy demanded
- TR does not change

Question 15

factors that determine the price elasticity of demand

Answer 15

1. availability of close substitutes is very important
2. whether good is a necessity or a luxury
3. share of income spent on the good
4. lenght of time elapsed since the price change matters

Question 16

cross-price elasticity of demand

Answer 16

% change in quanity of A demanded /% change in price of B

Question 17

cross-price elasticity of demand for substitutes

Answer 17

• cross-price elasticity of demand is positive
  -because an increase in the price of one brand of cookies will increase the demand for other brands.

Question 18

cross-price elasticity of demand for complements

Answer 18

cross-price elasticity of demand is negative
example: increase in milk price causes a decrease in demand for oreo

Question 19

describe income elasticity of demand

Answer 19

measures how sensitive the quantity demanded of a good is to changes in income

Question 20

how to calculate income elasticity of demand

Answer 20

% change in quantity demanded/ % change in income

Question 21

income elasticity of demand: distinguishing normal and inferior goods.

Answer 21

normal goods–> income elasticity is positive
inferior goods–> income elasticity is negative

Question 22

normal goods can be income-elastic or not

Answer 22

for income-elastic goods–> income elascitiy is greater than 1
for income-inelastic goods–> include alsticirty is positive but less th1n1

Question 23

Measuring the price elastiicty of supply

Answer 23

%change in quantity supplied/% change in price

Question 24

describe elasticity of supply

Answer 24

A supply curve is elastic if a rise in price
increases the quantity supplied a lot (and
vice versa).
it’s inelastic if sellers change quantity just a
little.

Question 25

factors that affect the price elasticity of supply

Answer 25

1.Availability of inputs - if production is expensive--> supply curve will be inelastic - if production can be increased cheap--> supply curve is elastic. 2. Time - price elasticity increases as producers have more time to repsond to price changes.