Economics: Elasticity and Demand
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Economics: Elasticity and Demand

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Questions and Answers

What is the characteristic of perfectly elastic demand?

  • Demand curve is horizontal (correct)
  • Quantity demanded changes without a price change
  • Demand curve is vertical
  • Price changes do not affect quantity demanded

    • In which situation does unit elasticity occur?

  • Price changes are greater than quantity changes
  • Demand is completely responsive to price changes
  • Demand curve is perfectly inelastic
  • Percentage change in price equals percentage change in quantity demanded (correct)

    • Which factor increases the price elasticity of demand for a commodity?

  • Longer adjustment time (correct)
  • Less availability of substitutes
  • Short-term purchasing decisions
  • Higher percentage of income spent on the commodity

    • Why is the demand for luxury goods likely to be more elastic?

    <p>They have many close substitutes</p> Signup and view all the answers

    How does expenditure on a commodity relate to its price elasticity?

    <p>Greater percentage of income spent can increase elasticity</p> Signup and view all the answers

    What is an example of a commodity with low price elasticity of demand?

    <p>Salt</p> Signup and view all the answers

    In what time frame is demand usually more inelastic?

    <p>In the short run</p> Signup and view all the answers

    Which of the following is a determinant of price elasticity of demand?

    <p>Number of substitutes available</p> Signup and view all the answers

    What happens to total revenue when the price of a product is reduced and the demand is price elastic?

    <p>Total revenue increases.</p> Signup and view all the answers

    If a product has inelastic demand, what effect does a price increase have on the total amount spent by consumers?

    <p>Total amount spent increases.</p> Signup and view all the answers

    What is the elasticity of demand when quantity demanded does not change regardless of price changes?

    <p>Perfectly inelastic demand.</p> Signup and view all the answers

    As you move from point A to point E on a demand curve, how does elasticity behave?

    <p>It decreases but remains greater than one.</p> Signup and view all the answers

    What occurs when the demand for a product is of unitary elasticity?

    <p>Changes in price do not affect total revenue.</p> Signup and view all the answers

    What can be inferred about total revenue when demand is price elastic?

    <p>Total revenue decreases with a price increase.</p> Signup and view all the answers

    What does the elasticity coefficient indicate when it exceeds one?

    <p>Demand is elastic.</p> Signup and view all the answers

    What can be said about the quantity demanded and price reductions when demand is price elastic?

    <p>Percentage increase in quantity demanded is greater than the percentage decrease in price.</p> Signup and view all the answers

    What happens to total spending on goods when moving from point E to I under unitary elasticity?

    <p>Total spending decreases continually.</p> Signup and view all the answers

    What does elasticity of supply measure?

    <p>Percentage change in quantity supplied divided by percentage change in price.</p> Signup and view all the answers

    What is a characteristic of supply in the momentary period?

    <p>Supply is restricted to existing market quantities.</p> Signup and view all the answers

    How can supply be increased in the short run?

    <p>By employing more variable factors of production.</p> Signup and view all the answers

    If the price elasticity of demand for fresh fish is perfectly inelastic, how does the quantity demanded respond to a price change?

    <p>Quantity demanded remains unchanged with price changes.</p> Signup and view all the answers

    If a company wants to increase the quantity of computers sold by 5% and the price elasticity of demand is -2.5, what must the company do?

    <p>Decrease price by 0.5%.</p> Signup and view all the answers

    What is the required price change to reduce electricity consumption by 10% if the price elasticity of demand is -5?

    <p>Raise the price by 2.0%.</p> Signup and view all the answers

    When the price of radios decreases by 5% and quantity demanded increases by 5%, what is the effect on total revenue?

    <p>Total revenue remains unchanged.</p> Signup and view all the answers

    What characteristic do habitual commodities like tobacco and alcohol have regarding demand?

    <p>Their demand tends to be inelastic over a range of prices.</p> Signup and view all the answers

    What does a positive income elasticity of demand indicate about normal goods?

    <p>More is demanded at each price level as income rises.</p> Signup and view all the answers

    Which type of goods has an income elasticity of demand between 0 and +1?

    <p>Necessities</p> Signup and view all the answers

    What does a negative cross elasticity of demand imply about two commodities?

    <p>They are complementary goods.</p> Signup and view all the answers

    What is the consequence of a rise in income for inferior goods?

    <p>Demand decreases.</p> Signup and view all the answers

    Which statement about luxuries is accurate?

    <p>Demand rises more than proportionately to a change in income.</p> Signup and view all the answers

    Which scenario correctly illustrates the concept of substitute goods?

    <p>A decrease in the price of margarine leads to a decrease in the quantity demanded of butter.</p> Signup and view all the answers

    How is cross elasticity of demand calculated?

    <p>By measuring the change in quantity demanded of commodity X resulting from a change in price of commodity Y.</p> Signup and view all the answers

    What is point elasticity of demand primarily used for?

    <p>To measure responsiveness of demand to very small changes in price</p> Signup and view all the answers

    Which formula correctly represents the point elasticity of demand?

    <p>η = - (ΔQ/Q) / (ΔP/P)</p> Signup and view all the answers

    What does arc elasticity of demand measure?

    <p>Average elasticity between two price points</p> Signup and view all the answers

    Inelastic demand is characterized by which of the following statements?

    <p>The coefficient of price elasticity is less than 1</p> Signup and view all the answers

    What happens to the demand for a product with perfectly inelastic demand when the price changes?

    <p>Quantity demanded remains unchanged</p> Signup and view all the answers

    Elastic demand arises when the percentage change in quantity demanded is:

    <p>Greater than the percentage change in price</p> Signup and view all the answers

    What is typically ignored when interpreting the coefficient of price elasticity of demand?

    <p>The negative sign of the coefficient</p> Signup and view all the answers

    Which statement best describes elastic demand?

    <p>The coefficient of price elasticity is greater than 1</p> Signup and view all the answers

    What happens to the quantity demanded of a commodity when its price increases, ceteris paribus?

    <p>It falls.</p> Signup and view all the answers

    What is the formula for calculating the price elasticity of demand?

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

    In the formula for price elasticity of demand, what does η represent?

    <p>The price elasticity of demand.</p> Signup and view all the answers

    How can the price change be expressed when calculating elasticity?

    <p>As a percentage of the average price.</p> Signup and view all the answers

    Which of the following describes the price elasticity of demand?

    <p>A units-free measure of responsiveness of quantity demanded.</p> Signup and view all the answers

    What could be the effect of a 10% increase in the price of sugar on its quantity demanded?

    <p>A sharp decline in quantity demanded.</p> Signup and view all the answers

    When demand for a commodity is elastic, what happens to total revenue when the price decreases?

    <p>Total revenue increases.</p> Signup and view all the answers

    Which statement about price elasticity of demand is incorrect?

    <p>It involves the initial price only.</p> Signup and view all the answers

    Study Notes

    Elasticity

    • Elasticity is a measure of responsiveness.
    • It shows how much one variable changes in response to a change in another variable.
    • Price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.

    Price Elasticity of Demand

    • Shows the responsiveness of quantity demanded to a change in price.
    • Measured using the formula: η = (percentage change in quantity demanded) / (percentage change in price)
    • η represents the price elasticity of demand.

    Calculating Price Elasticity of Demand

    • Express price change as a percentage of average price (initial and new price average).
    • Express quantity demanded change as a percentage of average quantity (initial and new quantity average).
    • Two methods: Point elasticity (for small price changes) and Arc elasticity (for larger price changes).

    Point Elasticity of Demand

    • Proportionate change in quantity demanded from a very small proportionate change in price.
    • Formula applicable for point elasticity of demand: η = (ΔQ/Q) / (ΔP/P) where ΔQ/Q is the percentage change in quantity, ΔP/P is the percentage change in price, Q is the initial quantity and P is the initial price.

    Arc Elasticity of Demand

    • Measures average elasticity at the midpoint of the chord connecting the two points (initial and new price levels) on the demand curve.
    • Formula: η =(ΔQ / [(Q1 + Q2)/2]) / (ΔP / [(P1 + P2)/2])

    Interpretation of Price Elasticity of Demand

    • The negative sign is ignored in the interpretation, only the absolute value is considered.
    • Different interpretations exist.
      • Inelastic demand: Percentage change in quantity is less than the percentage change in price. The numeric value of the coefficient is less than 1.
      • Elastic demand: Percentage change in quantity demanded exceeds the percentage change in price. The coefficient is usually greater than 1, but less than infinity.
      • Perfectly inelastic: Coefficient is zero (demand curve is vertical). Change in price has no effect on quantity demanded.
      • Perfectly elastic: Coefficient is infinite (demand curve is horizontal). Any price change will lead to a change in quantity demanded.
      • Unitary elasticity: Percentage change in quantity is equal to the percentage change in price. The coefficient is equal to 1.

    Determinants of Price Elasticity of Demand

    • Number of close substitutes: More substitutes, higher elasticity.
    • Expenditure on the commodity: Higher percentage of income spent, higher elasticity.
    • Adjustments time: Longer time, higher elasticity.
    • Nature of the commodity: Necessities tend to be inelastic.
    • Habit: Habit-forming goods are usually inelastic.

    Income Elasticity of Demand

    • Measures percentage change in quantity demanded resulting from a percentage change in consumer income.
    • Formula: ηm = (ΔQ/Q) / (ΔM/M) where ΔQ/Q is the percentage change in quantity, ΔM/M is the percentage change in income, Q is the initial quantity, and M is the initial income.

    Normal Goods

    • Positive income elasticity of demand.
    • Demand increases as income rises.
    • Necessities: 0 < ηm < 1; Luxuries: ηm > 1.

    Inferior Goods

    • Negative income elasticity of demand.
    • Demand falls as income rises.

    Cross Elasticity of Demand

    • Measures percentage change in quantity demanded of one commodity resulting from a percentage change in price of another commodity.
    • Formula: ηxy = (ΔQx/Qx) / (ΔPy/Py)

    Complementary Goods

    • Negative cross elasticity.
    • A fall in the price of one leads to an increase in quantity demanded of the other. (e.g., bread and butter).

    Substitute Goods

    • Positive cross elasticity.
    • A fall in the price of one commodity leads to a decrease in the quantity demanded of the other. (e.g., butter and margarine).

    Relationship between Elasticity and Total Revenue

    • Price elasticity of demand impacts total revenue.
    • Elastic demand: Price decrease leads to an increase in total revenue.
    • Inelastic demand: Price decrease leads to a decrease in total revenue.
    • Unitary elasticity: Price change has no effect on total revenue.

    Elasticity of Supply

    • Shows how much quantity supplied changes in response to a price change.
    • Formula: ε = (percentage change in quantity supplied) / (percentage change in price)
    • Factors influencing supply elasticity include time.

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    Elasticity PDF

    Description

    This quiz covers the concepts of elasticity in economics, particularly focusing on price elasticity of demand. It explains the calculations involved and the different types of elasticity, such as point and arc elasticity. Test your understanding of how quantity demanded changes in response to price fluctuations.

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