Elasticity -Chapter 3 (J)

Question 1

What is Elasticity

Answer 1

The responsiveness of one variable to change in another. When price rises and demand falls

Question 2

4 Types of Elasticity

Answer 2

• price elasticity of demand
• price elasticity of supply
• income elasticity of supply
• cross elasticity of demand

Question 3

What does elasticity measure

Answer 3

Measures the extent (response) to which quantity will change (demand or supply) due to a change in some relevant factors (price or the price of other good)

Question 4

Price elasticity of demand is

Answer 4

the responsiveness of a change in demand to a change in price

Question 5

Factors / determinate affecting elasticity of demand

Answer 5

1. time period
2. number of close substitutes
3. the proportion of income made by the product
4. luxury or necessity

Question 6

Time period

Answer 6

the time it takes for people to change their demand habits (short= elastic, long = inelastic)

Question 7

Price elasticity of demand or supply greater than 1

Answer 7

elastic

Question 8

Price elasticity of demand or supply less than 1

Answer 8

inelastic

Question 9

Price elasticity of demand or supply is 1

Answer 9

unit-elastic

Question 10

Price elastic goods are…

Answer 10

flexible, a change in price has a big change in demand. eg. housing, restaurant meals, airline travel, foreign travel (likes to pay the lowest price)

Question 11

Price inelastic goods are…

Answer 11

not flexible, a change in price has little to no change in demand. often necessities or addictive. eg. eggs, beef, stationary, gasoline, alcohol, cigarettes, drugs (will pay any price)

Question 12

Total revenue formula:

Answer 12

price x quantity demanded ( TR = P x Qd )

Question 13

If price elasticity of demand is elastic, total revenue…

Answer 13

moves in the opposite direction. (price goes up, TR goes down) (price goes down, TR goes up) inverse relationship

Question 14

If price elasticity of demand is inelastic, total revenue…

Answer 14

moves in the same direction. (price goes up, TR goes up) (price goes down, TR goes down) positive relationship

Question 15

Price elasticity of supply is…

Answer 15

the responsiveness of a change in supply to a change in price

Question 16

Factors / determinates affecting elasticity of supply

Answer 16

1. time period (how long it takes to respond)
2. nature of industry
3. ability to store inventories

Question 17

nature of industry

Answer 17

durable good - white goods, cars, furniture, clothes, last 1-5 years: elastic, can respond quickly
non durable goods - agriculture products, food, wheat, milk, under a year: inelastic, cant respond because difficult to increase production due to seasonal nature of the industry

Question 18

Suppliers are less responsive if price elasticity is

Answer 18

inelastic. difficult to react swiftly (quicker) to changes in prices

Question 19

Suppliers are more responsive if price elasticity is

Answer 19

elastic. can react swiftly (quicker) to changes in price

Question 20

formula : price elasticity or supply or demand

Answer 20

% change in quanity (d/s)
____________________________________
% change in price

Question 21

Price discrimination (advanced)

Answer 21

A selling strategy that charges customers different prices for the same product or service based on what the seller thinks they can get the customer to agree to. (firms use their knowledge of elasticity to increase their total revenue)

Question 22

Price discrimination (basic)

Answer 22

Different consumer groups have different price elasticity. Firms use this knowledge to charge different levels or prices to increase total revenue. (eg charge women more for haircuts cos its inelastic, charge children less for movies cos they don’t have their own income)

Question 23

Tax incidence

Answer 23

the manner in which the tax burden is divided between buyers and sellers. depends on the relative price elasticity of supply and demand

Question 24

Burden of the tax falls on consumers when demand is…

Answer 24

inelastic compared to supply

Question 25

Tax revenue is larger the more…

Answer 25

inelastic demand and supply are

Question 26

Advantages of taxing inelastic goods

Answer 26

1. very effective at helping raise revenue
   (could be used to limit the effects of using the good)
2. has marginal impact on quantity
   (effect on industry output and employment will not be as great as compared to a tax on elastic goods)