Questions and Answers
Define the price elasticity of demand and the income elasticity of demand.
The price elasticity of demand measures how much quantity demanded responds to a change in price. The income elasticity of demand measures how much quantity demanded responds to changes in consumers' income.
List and explain the four determinants of the price elasticity of demand.
The determinants include the availability of close substitutes, whether the good is a necessity or a luxury, the breadth of the definition of the market, and the time horizon.
If the elasticity is greater than 1, is demand elastic or inelastic?
True
If elasticity equals zero, is demand perfectly elastic or perfectly inelastic?
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If demand is elastic, how will an increase in price change total revenue?
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What do we call a good with an income elasticity less than zero?
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How is the price elasticity of supply calculated?
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If a fixed quantity of a good is available, and no more can be made, what is the price elasticity of supply?
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Is the destruction of half the fava bean crop more likely to hurt farmers if the demand for fava beans is very elastic or very inelastic?
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Study Notes
Price and Income Elasticity of Demand
- Price elasticity of demand quantifies how much quantity demanded changes in response to price variations.
- Income elasticity of demand measures how quantity demanded varies with changes in consumer income.
Determinants of Price Elasticity of Demand
- Availability of Close Substitutes: Greater availability leads to higher elasticity.
- Necessity vs. Luxury: Luxury goods typically have higher price elasticity compared to necessities.
- Market Definition: More narrowly defined markets tend to exhibit greater elasticity.
- Time Horizon: Demand elasticity increases with longer time periods due to consumer adjustments.
Elasticity Values
- An elasticity greater than one indicates elastic demand; small price changes result in significant changes in quantity demanded.
- Elasticity equal to zero represents perfectly inelastic demand; quantity demanded remains unchanged despite price changes.
Impact of Price Changes on Total Revenue
- For elastic demand, an increase in price leads to a decrease in total revenue; the reduction in quantity demanded outweighs the price increase.
Types of Goods
- Goods with an income elasticity less than zero are classified as inferior goods; demand decreases as consumer income rises.
Price Elasticity of Supply
- Calculated as the percentage change in quantity supplied divided by the percentage change in price.
- It indicates the responsiveness of quantity supplied to price changes.
Fixed Supply Scenarios
- When a fixed quantity of a good is available and cannot be increased, the price elasticity of supply is zero; price changes do not affect the quantity supplied.
Effects of Supply Shocks
- A significant supply shock, like a storm destroying half of a crop, negatively impacts farmers more if demand is elastic; higher prices result in significantly lower total revenue as quantity demanded falls disproportionately to price increases.
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Description
This quiz focuses on key concepts from Chapter 5 of your economics textbook, covering the price elasticity of demand and its determinants. Test your knowledge on how different factors affect demand and understand the relationship between price changes and consumer behavior.
