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Questions and Answers
A good typically exhibits a small price elasticity of demand when it is considered a:
A good typically exhibits a small price elasticity of demand when it is considered a:
- Market-defined item
- Luxury item
- Necessity (correct)
- Non-essential good
Total spending on a good decreases with an increase in its price when the price elasticity of demand is:
Total spending on a good decreases with an increase in its price when the price elasticity of demand is:
- Negative one
- Equal to one
- Greater than one
- Less than one (correct)
A linear demand curve can differ in elasticity; at certain points, it is classified as:
A linear demand curve can differ in elasticity; at certain points, it is classified as:
- Inelastic at some points and elastic at others (correct)
- Always elastic
- Unit elastic
- Always inelastic
If the citizens of Rohan disproportionately spend on food due to lower incomes, which statement regarding income elasticity is accurate?
If the citizens of Rohan disproportionately spend on food due to lower incomes, which statement regarding income elasticity is accurate?
Given a price increase from $16 to $24, if quantity supplied rises from 90 to 110 units, what is the price elasticity of supply based on the midpoint method?
Given a price increase from $16 to $24, if quantity supplied rises from 90 to 110 units, what is the price elasticity of supply based on the midpoint method?
What is the characteristic shape of the supply curve when the price elasticity of supply is zero?
What is the characteristic shape of the supply curve when the price elasticity of supply is zero?
What is likely to happen to the demand curve in the long run if firms are able to freely enter and exit the market?
What is likely to happen to the demand curve in the long run if firms are able to freely enter and exit the market?
An increase in the supply of grain leads to a drop in total revenue for grain producers when the demand curve is:
An increase in the supply of grain leads to a drop in total revenue for grain producers when the demand curve is:
Why might farmers adopt new technologies that ultimately reduce their revenue in competitive markets?
Why might farmers adopt new technologies that ultimately reduce their revenue in competitive markets?
What does the price elasticity of demand measure?
What does the price elasticity of demand measure?
When is demand considered elastic?
When is demand considered elastic?
Which of the following is a determinant of price elasticity of demand?
Which of the following is a determinant of price elasticity of demand?
What characterizes a good with inelastic demand?
What characterizes a good with inelastic demand?
If the price elasticity of demand is measured as unit elastic, what does this imply?
If the price elasticity of demand is measured as unit elastic, what does this imply?
How is income elasticity of demand defined?
How is income elasticity of demand defined?
What is the primary factor affecting price elasticity of supply?
What is the primary factor affecting price elasticity of supply?
In the context of cross-price elasticity, what does a positive value indicate?
In the context of cross-price elasticity, what does a positive value indicate?
What characterizes perfectly inelastic demand?
What characterizes perfectly inelastic demand?
What characterizes a good with perfectly elastic demand?
What characterizes a good with perfectly elastic demand?
When is demand considered inelastic?
When is demand considered inelastic?
According to the Total Revenue Rule, if demand is unit elastic, what happens to total revenue when price decreases?
According to the Total Revenue Rule, if demand is unit elastic, what happens to total revenue when price decreases?
Which scenario describes the Quantity Effect and Price Effect relationship when demand is elastic?
Which scenario describes the Quantity Effect and Price Effect relationship when demand is elastic?
What effect does a decrease in price generally have when demand is inelastic?
What effect does a decrease in price generally have when demand is inelastic?
What determines the distribution of the tax burden in the market?
What determines the distribution of the tax burden in the market?
What does a perfectly inelastic demand curve signify?
What does a perfectly inelastic demand curve signify?
In the context of elasticity, what happens when a subsidy is applied to a good with inelastic demand?
In the context of elasticity, what happens when a subsidy is applied to a good with inelastic demand?
When comparing price elasticity between two intersecting curves, what initial step should be taken?
When comparing price elasticity between two intersecting curves, what initial step should be taken?
What indicates that demand is elastic when relating price and quantity?
What indicates that demand is elastic when relating price and quantity?
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Study Notes
Elasticity
- Elasticity measures the responsiveness of quantity demanded or supplied to changes in its determinants.
Price Elasticity of Demand (Ed)
- Measures the percentage change in quantity demanded divided by the percentage change in price.
- Elastic demand: |Ed| > 1 (large response in quantity to price change).
- Inelastic demand: |Ed| < 1 (small response in quantity to price change).
- Unit elastic demand: |Ed| = 1 (change in quantity equals change in price).
Determinants of Price Elasticity of Demand
- Availability of close substitutes: More substitutes, more elastic demand.
- Necessities vs. luxuries: Luxuries tend to have more elastic demand.
- Market definition: Broadly defined markets have more substitutes, leading to more elastic demand.
- Time horizon: Longer time period allows consumers to adjust, making demand more elastic.
Other Elasticities
- Income Elasticity of Demand (EI): Measures sensitivity of quantity demanded to changes in consumer income.
- Cross-Price Elasticity of Demand (EXY): Measures the response in demand for good X when the price of good Y changes.
Price Elasticity of Supply (Es)
- Measures how much quantity supplied responds to changes in price.
- Determinants include production flexibility and time horizon.
Elasticity: Definition
- EX,Y denotes the X elasticity of Y.
- Perfectly elastic: |EX,Y| = ∞ (infinite response).
- Elastic: |EX,Y| > 1 (large response).
- Unit elastic: |EX,Y| = 1 (equal response).
- Inelastic: |EX,Y| < 1 (small response).
- Perfectly inelastic: |EX,Y| = 0 (no response).
Calculating Elasticity: Midpoint Formula
- Used to avoid different elasticity values depending on the direction of change.
Price Elasticity of Demand: Total Revenue Rule
- Quantity Effect: When price decreases, more units are sold.
- Price Effect: When price decreases, revenue per unit decreases.
- When Ed is elastic, Quantity Effect dominates, leading to increased total revenue.
- When Ed is unit elastic, the two effects cancel out, leading to no change in total revenue.
- When Ed is inelastic, Price Effect dominates, leading to decreased total revenue.
Elasticity and Tax Incidence
- The burden of a tax is greater on the side of the market with less elasticity.
Elasticity and Surplus
- The side with more inelastic demand or supply bears a greater burden of a tax and benefits more from a subsidy.
Comparing Price Elasticity of Two Intersecting Curves
- Draw two intersecting curves and a fixed change in price.
- The curve with a larger change in quantity has a higher price elasticity.
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