Elasticity of Demand Supply

Question 1

What is elasticity?

Answer 1

It is the measurement of how changing one economic variable affects others

Question 2

What does elasticity show?

Answer 2

It shows responsiveness, eg if the price of a good changes

Question 3

What happens if the sign is positive?

Answer 3

The variables change in the same direction, eg if price falls, demand falls

Question 4

What happens if the sign is negative?

Answer 4

The variables change in opposite directions, eg if price goes up, quantity demanded falls

Question 5

What does elastic mean?

Answer 5

Value is > 1

Question 6

What does inelastic mean?

Answer 6

Value is < 1

Question 7

What does unit elastic mean?

Answer 7

Value is exactly 1

Question 8

What does complete inelastic mean?

Answer 8

Value is 0

Question 9

What does perfect elastic mean?

Answer 9

Value is infinite, eg it is so elastic that we can’t measure it

Question 10

What is price elasticity of demand?

Answer 10

It is the responsiveness of the quantity demanded of a good to a change of its own price

Question 11

What is the formula to calculate price elasticity?

Answer 11

% of quantity demanded divided by the % in the price of the product

Question 12

What happens if the price elasticity is negative?

Answer 12

The demand curve is downward sloping

Question 13

What happens if the price elasticity is positive?

Answer 13

The demand curve is upward sloping (rare occasion)

Question 14

What happens if elasticity is fairly steep?

Answer 14

Value is high

Question 15

What happens if elasticity is a flat line?

Answer 15

Value is low

Question 16

What are the determinants of price elasticity of demand?

Answer 16

How differentiated a product is, the time period involved, brand loyalty, who pays, the type and nature of a product, the % of income spent on the product

Question 17

What is total revenue?

Answer 17

Total consumer expenditure

Question 18

How do you calculate total revenue?

Answer 18

Price x quantity

Question 19

What does it mean if price elasticity of demand is elastic?

Answer 19

Relative change in quantity demanded is more than the relative change in price

Question 20

What does it mean if price elasticity of demand is inelastic?

Answer 20

Relative change of quantity demanded is less than the relative change in price

Question 21

Why is it important for a firm to know if they are on the elastic part or inelastic part of the curve?

Answer 21

It shows whether or not total revenue increases or decreases

Question 22

When does maximum total revenue occur?

Answer 22

At unit elastic demand

Question 23

What is income elasticity of demand?

Answer 23

It is the responsiveness of the quantity demanded of a good to a change of income

Question 24

What is the formula for income elasticity of demand?

Answer 24

% change in quantity demand divided by change in income

Question 25

Is the income elasticity positive or negative for normal goods?

Answer 25

Positive. As income increases then people will spend more money

Question 26

Is the income elasticity positive or negative for inferior goods?

Answer 26

Negative. Instead I buying low brand products, they buy branded products

Question 27

What is cross-price elasticity of demand?

Answer 27

It is the responsiveness of the quantity demanded of one product to a change in price of another product

Question 28

What is the formula for cross-price elasticity of demand?

Answer 28

% change in quantity demanded for good A divided by % change in price of good B

Question 29

Why might the cross-price elasticity be positive?

Answer 29

If the two goods are substitutes

Question 30

Why might the cross-price elasticity of demand be negative?

Answer 30

If they are complements

Question 31

Why might the cross-price elasticity be zero?

Answer 31

If they are unrelated

Question 32

What is the short run?

Answer 32

The period in which at least one input is fixed, eg no. of suppliers

Question 33

What is the long run?

Answer 33

The period in which all input is variable

Question 34

What is the law of supply?

Answer 34

When the price of a good rises, the quantity supplied rises

Question 35

What happens to the law of supply in the short run?

Answer 35

Unit costs tend to rise beyond a certain level of output

Question 36

What happens to the law of supply in the long run?

Answer 36

New suppliers will move into the industry to take advantage of the new opportunity to make a profit

Question 37

What does the law of supply tell us?

Answer 37

It tells us that the supply curve is upward sloping

Question 38

What does the supply curve show?

Answer 38

It shows the relationship between the prices and quantity supplied at all possible prices. It shows an increase in price, a higher quantity is supplied

Question 39

What are the determinants of supply?

Answer 39

Price of good, cost, technology, no. of suppliers, profitability of other goods, other

Question 40

What causes a movement along the supply curve?

Answer 40

A change in price of a good or quantity supplied

Question 41

What causes a shift of the demand curve?

Answer 41

Change in supply (or any other change that’s not price). It shows that as the same price, we have a lower supply

Question 42

What is the industry supply curve?

Answer 42

It is the horizontal summation of the individual firms’ supply curves

Question 43

What is the price elasticity of supply?

Answer 43

It is the responsiveness of the quantity supplied of a good to a change of its own price

Question 44

What is the formula for price elasticity of supply?

Answer 44

% change in quantity supplied divided by % change in the price of the product

Question 45

What happens if the price elasticity of supply is positive?

Answer 45

The supply curve is upward sloping

Question 46

What happens if the price elasticity of supply is negative?

Answer 46

The supply curve is downward sloping

Question 47

What happens at unit elastic supply?

Answer 47

Price elasticity of supply = 1

Question 48

What happens at perfect inelastic supply?

Answer 48

Price elasticity of supply = 0

Question 49

What happens at perfect elastic supply?

Answer 49

Price elasticity of supply = infinite, horizontal line