🔹 CHAPTER 5 – ELASTICITY

Question 1

What does Price Elasticity of Demand (PED) measure?

Answer 1

Responsiveness of quantity demanded to price changes

Formula: E_d = %Δ Quantity Demanded / %Δ Price

Question 2

What is the formula for Price Elasticity of Demand (PED)?

Answer 2

E_d = %Δ Quantity Demanded / %Δ Price

This formula calculates how much the quantity demanded changes in response to a price change.

Question 3

What characterizes elastic demand?

Answer 3

E_d > 1: Quantity demanded changes significantly

Example: earbuds

Question 4

What characterizes inelastic demand?

Answer 4

E_d < 1: Quantity demanded changes minimally

Example: insulin

Question 5

What is the characteristic of perfectly elastic demand?

Answer 5

Horizontal demand curve (E = ∞)

Indicates that any price change leads to infinite changes in quantity demanded.

Question 6

What is the characteristic of perfectly inelastic demand?

Answer 6

Vertical demand curve (E = 0)

Indicates that quantity demanded does not change regardless of price changes.

Question 7

Name one determinant of Price Elasticity of Demand (PED).

Answer 7

• More substitutes
• More time to adjust
• Higher share of income

These factors influence how responsive consumers are to price changes.

Question 8

How does elasticity affect total revenue (TR)?

Answer 8

• Elastic demand: ↓P → ↑TR
• Inelastic demand: ↑P → ↑TR

Total Revenue (TR) is calculated as TR = P × Q.

Question 9

Where is the unit elastic point located on a straight demand curve?

Answer 9

At the midpoint

This is where total revenue is maximized.

Question 10

What does Price Elasticity of Supply (PES) measure?

Answer 10

Responsiveness of quantity supplied to price changes

Similar to PED but focuses on supply side.

Question 11

What characterizes elastic supply?

Answer 11

PES > 1: Easy to increase production

Example: snow shoveling

Question 12

What characterizes inelastic supply?

Answer 12

PES < 1: Hard to increase production

Example: gold mining

Question 13

Name a determinant of Price Elasticity of Supply (PES).

Answer 13

• Availability of inputs
• Time needed to adjust production

These factors affect how quickly producers can respond to price changes.

Question 14

What does Cross Elasticity of Demand (XED) measure?

Answer 14

Responsiveness of demand for one product to price changes of another

Indicates the relationship between two goods.

Question 15

What does a positive Cross Elasticity of Demand (XED) indicate?

Answer 15

Substitutes

When the price of one good increases, the demand for the substitute increases.

Question 16

What does a negative Cross Elasticity of Demand (XED) indicate?

Answer 16

Complements

When the price of one good increases, the demand for the complement decreases.

Question 17

What does Income Elasticity of Demand (YED) measure?

Answer 17

Responsiveness of demand to income changes

Indicates how demand varies with consumer income.

Question 18

What does a positive Income Elasticity of Demand (YED) indicate?

Answer 18

Normal goods

Demand increases as income increases.

Question 19

What does a negative Income Elasticity of Demand (YED) indicate?

Answer 19

Inferior goods

Demand decreases as income increases.

Question 20

What does an Income Elasticity of Demand (YED) between 0 and 1 indicate?

Answer 20

Necessities

Demand increases with income but at a slower rate.

Question 21

What does an Income Elasticity of Demand (YED) greater than 1 indicate?

Answer 21

Luxuries

Demand increases significantly as income increases.

Question 22

What is tax incidence?

Answer 22

Who bears the burden of a tax

Depends on the elasticity of demand and supply.

Question 23

True or false: Inelastic demand means buyers pay more of the tax burden.

Answer 23

TRUE

Inelastic demand leads to buyers bearing a larger share of the tax burden.

Question 24

True or false: Governments tax elastic goods for more revenue.

Answer 24

FALSE

Governments typically tax inelastic goods (e.g., gas, alcohol) for more revenue.