Economics Chapter 4: Elasticity of Supply and Demand

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Questions and Answers

What happens to equilibrium price and quantity sold when demand becomes more elastic?

Price decreases and quantity sold remains constant.

Price remains constant and quantity sold remains constant.

Price decreases and quantity sold increases. (correct)

Price increases and quantity sold decreases.

How is the coefficient of income elasticity calculated?

By dividing percentage change in income by percentage change in quantity.

By subtracting the percentage change in quantity from the percentage change in income.

By multiplying percentage change in quantity by percentage change in income.

By dividing the percentage change in quantity by the percentage change in income. (correct)

Which statement is true regarding the effects of less elastic supply?

It has no impact on prices or quantities sold.

It results in lower prices and higher quantity sold.

It results in constant prices and quantity sold.

It results in higher prices and lower quantity sold. (correct)

What does the coefficient of cross elasticity of demand measure?

The percentage change in quantity demanded of Good A in response to the price change of Good B. Signup and view all the answers

In which scenario would a product typically have a negative cross elasticity of demand?

When the price of a complementary good increases. Signup and view all the answers

What does price elasticity measure?

The percentage change in quantity against the percentage change in price. Signup and view all the answers

Which scenario best exemplifies inelastic demand?

Households continue buying milk even when prices increase significantly. Signup and view all the answers

What characterizes perfectly inelastic demand?

Quantity demanded remains constant regardless of price changes. Signup and view all the answers

If the price elasticity coefficient is greater than 1, how is the demand described?

Elastic. Signup and view all the answers

What is an example of a good with elastic demand?

Spa treatments. Signup and view all the answers

Which type of elasticity occurs when quantity demanded changes proportionally to the change in price?

Unitary. Signup and view all the answers

Cross elasticity of demand measures the relationship between what two factors?

One good's quantity change and another good's price change. Signup and view all the answers

If the demand for a product is described as elastic, what does this imply regarding price changes?

Small changes in price lead to large changes in quantity demanded. Signup and view all the answers

Study Notes

Elasticity Overview

Elasticity measures the responsiveness of demand and supply to changes in price and other determinants.
Types of elasticity include price elasticity, income elasticity, and cross elasticity.

Price Elasticity

Price elasticity indicates the percentage change in quantity demanded relative to a percentage change in price.
Examples:
- Diet coke demand is elastic due to available alternatives.
- Milk demand remains stable despite price increases, showing inelasticity.
- Spa treatments are highly elastic as they are luxuries that consumers can forgo.

Types of Demand Elasticity

Elastic: Demand changes more than proportionally when price changes (elasticity coefficient > 1).
Inelastic: Demand changes less than proportionally when price changes (elasticity coefficient < 1).
Unitary: Demand changes proportionally to price changes (elasticity coefficient = 1).
Perfectly Elastic: Infinite change in quantity demanded at a specific price level.
Perfectly Inelastic: No change in quantity demanded regardless of price change.

Effects of Demand Elasticity

An increase in elasticity leads to a smaller price increase and greater quantity sold.
A decrease in elasticity results in steeper price increases and lower quantity sold.

Supply Elasticity

Less elastic supply results in higher price increases and smaller quantity increases.
More elastic supply yields lower price increases and greater quantity sold.

Income Elasticity

Measures how quantity demanded changes in response to income changes.
Formula: ey = Percentage change in quantity / Percentage change in income.
High income elasticity indicates normal goods; low/income elasticity suggests inferior goods.

Cross Elasticity

Reflects how the quantity demanded of one good responds to the price change of another good.
Formula: Ec = Percentage change in quantity demanded of Good A / Percentage change in price of Good B.
Positive cross elasticity indicates substitutes, while negative values indicate complements.

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Description

This quiz covers Chapter 4 on the elasticity of supply and demand, prepared by instructor Rolando M. Solano. It explores various concepts of elasticity, including price elasticity, income elasticity, and cross elasticity. Test your understanding of how these measures react to changes in demand, supply, price, and income.