Economics Chapter on Elasticity

Questions and Answers

What does the price elasticity of demand express?

The percentage change in quantity demanded as a result of a percentage change in price (correct)

The absolute change in price divided by the absolute change in quantity demanded

The ratio of quantity demanded to price changes, regardless of direction

The total revenue generated from sales of a good relative to its price

Which of the following factors would cause demand to become more elastic?

Classifying the good as a necessity rather than a luxury

The availability of more close substitutes (correct)

A decrease in the availability of close substitutes

An increase in consumer income levels

What is the primary advantage of using the midpoint method for calculating price elasticity of demand?

It only applies to luxury goods

It yields consistent elasticity values regardless of the direction of price change (correct)

It simplifies the calculation to avoid percentage changes

It provides a lower estimate of elasticity

Which scenario is likely to yield a less elastic demand for a product?

<p>A significant decrease in the availability of substitutes</p> Signup and view all the answers

How is the price elasticity of demand calculated?

<p>By computing the percentage change in quantity demanded divided by the percentage change in price</p> Signup and view all the answers

Study Notes

Elasticity Overview

Elasticity measures the responsiveness of buyers and sellers to market changes.
Price elasticity of demand specifically gauges how quantity demanded changes in response to price variations.

Price Elasticity of Demand Calculation

Price elasticity of demand formula:
- Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)
Use of midpoint formula provides consistent results irrespective of price change direction:
- (Q2 − Q1) / [(Q2 + Q1) / 2] for quantity
- (P2 − P1) / [(P2 + P1) / 2] for price

Determinants of Price Elasticity of Demand

Demand elasticity increases with:
- Availability of close substitutes.
- Characterization of the good as a luxury rather than a necessity.
- Wider market definitions.
- Longer time horizons for consumers to adjust their purchasing behavior.

Demand Curve Types

Inelastic Demand: Small changes in quantity demanded despite price changes (elasticity between 0 and 1).
Elastic Demand: Significant changes in quantity with price changes (elasticity greater than 1).
Perfectly Inelastic Demand: Quantity demanded remains constant regardless of price changes (elasticity equals 0).
Perfectly Elastic Demand: Quantity changes infinitely with any price change (elasticity equals infinity).
Unit Elastic Demand: Quantity changes by the same percentage as the price (elasticity equals 1).

Elasticity Implications

The sensitivity of quantity demanded to price changes is indicated by the slope of the demand curve but is not identical to it.
Own-price elasticity of demand varies with the good type, influencing how consumer response differs.

Total Revenue and Price Elasticity

Total revenue (TR) is calculated as price (P) multiplied by quantity sold (Q): TR = P × Q.
An increase in price can lead to increased total revenue when demand is inelastic, as the decrease in quantity demanded is proportionately smaller.

Other Demand Elasticities

Income Elasticity of Demand: Measures responsiveness of quantity demanded to changes in consumer income.
- Positive for normal goods (demand increases with income).
- Negative for inferior goods (demand decreases with income).
- Income inelastic for necessities (food, utilities), and elastic for luxuries (sports cars, expensive items).

Income Elasticity Calculation

Income Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Income).
Understanding the distinction between normal and inferior goods aids in predicting demand shifts based on income changes.

Description

This quiz focuses on the elasticity of demand, a key concept in economics that measures how quantity demanded responds to price changes. Test your understanding of how supply and demand interact in various market conditions and the implications of elasticity for buyers and sellers.