Chapter 5 (ELASTICITY)

Question 1

Elasticity

Answer 1

How Qd and Qs respond to change

• responsiveness

Question 2

Elasticity of Demand

Answer 2

• Inelastic Demand: small response in Qd when price rises (>1)
• Elastic Demand: large response in Qd when price rises
  (<1)

Price Elasticity of Demand: %change in Qd / %change in P

Question 3

Perfectly inelastic and elastic Demand

Answer 3

• perfectly inelastic demand: price elasticity of demand EQUALS 0, quantity demanded remains constant in price
  (Perfectly vertical on graph)
• perfectly elastic demand: price elasticity of demand EQUALS infinity, Qd has an infinite response to any change in price
  (Perfectly horizontal on graph)

Question 4

Factors that make demand more elastic

Answer 4

• more and better substitutes available
• the larger time to adjust to a price rise
• the greater the proportion of income spent on a product

Question 5

Total revenue and demand

Answer 5

• elastic demand: price CUTS is the smart choice and increase total revenue
• inelastic demand: price RISES is the smart choice and increases total revenue

Question 6

Elasticity of Supply

Answer 6

• inelastic of supply: small response in Qs when price rises (>1)
• elastic of supply: large response in Qs when price rises (<1)

Elasticity of supply: % change in Qs / % change in P

Question 7

Perfectly inelastic and elastic supply

Answer 7

• perfectly inelastic supply: price elasticity of supply = 0, Qs remains constant when price changes
• perfectly elastic supply: price elasticity of supply = infinity, Qs has infinite response to a change in price

Question 8

Factors that affect elasticity of supply

Answer 8

• depends on availability of additional inputs and the time production takes
• allows more accurate predictions of future outputs and prices (smart choices), helping businesses avoid disappointing customers

Question 9

Cross elasticity of demand

Answer 9

• measures the responsiveness of the demand for a product or service to a change in the price of a substitue or complement
• substitutes: a positive number
• complements: a negative number
• larger numbers for cross elasticity of demand mean more perfect substitutes or more perfect complements

Formula: % change Qd / % change P (related goods)

Question 10

Income elasticity of demand

Answer 10

• measures the responsiveness of the demand for a product or service to a change
• normal goods: positive
  increase in income increases demand for normal goods
  Necessities (inelastic): % change in quantity < % change in income
  Luxuries (elastic): % change in quantity > % change in income
• inferior goods: negative
  increase in income decreases demand for inferior goods
• equation: % change in Qd / % change income

Question 11

Tax incidence

Answer 11

• the division of a tax between buyers and sellers
• a tax on sellers shifts the supply curve by a vertical distance equal to the amount of the tax

Formula: tax per unit x units sold

Question 12

Elasticity of Demand and tax incidence

Answer 12

• perfectly inelastic demand = buyers pay all
• more inelastic demand = buyers pay more
• more elastic demand = sellers pay more
• perfectly elastic demand = sellers pay all

Question 13

Elasticity of supply and tax incidence

Answer 13

• perfectly inelastic supply = sellers pay all
• more inelastic supply = sellers pay more
• more elastic supply = buyers pay more
• perfectly elastic supply = buyers pay all