Lesson 8

Question 1

What is the Price Elasticity of Demand?

Answer 1

A measure of the sensitivity or responsiveness of the quantity demanded of a good to a change in its price.

Question 2

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

Answer 2

e=% change in quantity demanded% change in pricee=% change in price% change in quantity demanded​

Question 3

What is the more precise, non-percentage formula for elasticity?

Answer 3

e=Δq/qΔp/pe=Δp/pΔq/q​ which is equivalent to e=ΔqΔp×pqe=ΔpΔq​×qp​

Question 4

What does the term ΔqΔpΔpΔq​ represent in the elasticity formula?

Answer 4

The slope of the demand function.

Question 5

Why is the slope of the demand curve alone not a good measure of responsiveness?

Answer 5

Because it depends on the units of measurement. Elasticity is a unitless measure, allowing for comparison across different goods.

Question 6

If the elasticity value ∥e∥∥e∥ is greater than 1, how is demand described?

Answer 6

Elastic (demand is highly sensitive to price changes).

Question 7

If the elasticity value ∥e∥∥e∥ is less than 1, how is demand described?

Answer 7

Inelastic (demand is not very sensitive to price changes).

Question 8

If the elasticity value ∥e∥∥e∥ is equal to 1, how is demand described?

Answer 8

Unit Elastic (the percentage change in quantity demanded is equal to the percentage change in price).

Question 9

Why is the sign of the price elasticity of demand usually negative?

Answer 9

Because of the law of demand: price and quantity demanded typically move in opposite directions.

Question 10

In practice, how is the elasticity value often reported?

Answer 10

As an absolute value (e.g., “an elasticity of 1.5”) because the negative sign is often considered negligible for interpreting sensitivity.

Question 11

What is one mathematical approach to calculate the percentage changes for elasticity?

Answer 11

Using logarithms: e=Δlog⁡(q)Δlog⁡(p)e=Δlog(p)Δlog(q)​. This can be more precise for calculating arc elasticity.

Question 12

What does Elastic Demand ( |e| > 1 ) indicate?

Answer 12

Consumers are highly responsive. A 1% price increase leads to a more than 1% drop in quantity demanded.

Question 13

What does Inelastic Demand ( |e| < 1 ) indicate?

Answer 13

Consumers are not very responsive. A 1% price increase leads to a less than 1% drop in quantity demanded.

Question 14

What does Unit Elastic Demand ( |e| = 1 ) indicate?

Answer 14

The response is proportional. A 1% price increase leads to exactly a 1% drop in quantity demanded.