Chapter 4 - Elasticity

Question 1

What is elasticity?

Answer 1

a measure of the responsiveness to a change in a market condition

Question 2

Price elasticity of demand (definition)

Answer 2

measures the magnitude of change in the quantity demanded from a change in its price.

Question 3

what does “more elastic” mean?

aka elastic

Answer 3

when consumers’ buying decisions are highly influenced by price

• small change in price causes a large change in the quantity demanded
• consumers are very sensitive to price

Question 4

what does “more inelastic” mean? (less elastic)

aka inelastic

Answer 4

when consumers are not very sensitive to price changes

• will buy approximately the same quantity regardless of the price
• changes in price do not really change quantity demanded

Question 5

What is the midpoint method?

Answer 5

calculates the elasticity a the midpoint of any two points!

(Q2-Q1)/[(Q2+Q1)/2]
(P2-P1)/[(P2+P1)/2]

Question 6

What are the determinants of price elasticity of demand

Answer 6

• availability of substitutes
• degree of necessity
• cost relative to income
• adjustment time
• scope of the market

Question 7

What does perfectly inelastic mean?

Answer 7

demand curve is horizontal

• consumers are very sensitive to price, because demand drops to zero when the price increases even a MINUSCULE amount

Question 8

What is perfectly inelastic?

Answer 8

demand curve is vertical

• quantity demanded is the same no matter what the price

Question 9

Elastic

Answer 9

the absolute value of the price elasticity of demands is GREATER THAN 1

Question 10

Inelastic

Answer 10

the absolute value of the price elasticity of demand is LESS THAN 1

Question 11

Unit-Elastic

Answer 11

the absolute value of elasticity is EXACTLY 1

Question 12

What is total revenue?

Answer 12

the amount that a firm receives from the sale of goods and services

TR = P (price paid) x Q (quantity sold)

Question 13

What is quantity and price effect?

Answer 13

Quantity = decrease in revenue that results from selling fewer units of the good

Price = increase in revenue that results from receiving a higher price for each unit sold

*when demand is elastic, price increase causes total revenue to fall

Question 14

What is price elasticity of supply?

Answer 14

measures producers’ response (in quantity) to a change in price

midpoint formula

Question 15

What are the determinants of price elasticity of supply?

Answer 15

• availability of inputs
• flexibility of the production process
• adjustment time

Question 16

What is cross-price elasticity?

Answer 16

how the quantity demanded of one good changes when the price of a different good changes

Question 17

Cross- price elasticity of demand equation

Answer 17

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

Question 18

Positive cross-price elasticity

Answer 18

when two goods are substitutes

Question 19

Negative cross-price elasticity

Answer 19

when two goods are complements

Question 20

What is income elasticity of demand?

Answer 20

how much the quantity demanded changes in response to a change in consumers’ incomes

Question 21

Income elasticity of demand equation

Answer 21

% change in quantity demand / % change in income

>0 = good is normal (necessity) 
>1 = luxury 
<0 = good is inferior

Question 22

Normal and Inferior goods

Answer 22

Normal = demand INCREASES when income increases

Inferior = demand DECREASES when income increases