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Questions and Answers
What does price elasticity of demand measure?
What does price elasticity of demand measure?
Which factor is NOT a determinant of price elasticity of demand?
Which factor is NOT a determinant of price elasticity of demand?
How does the slope of a demand curve relate to elasticity?
How does the slope of a demand curve relate to elasticity?
What is the significance of elasticity in real-world applications?
What is the significance of elasticity in real-world applications?
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Which type of elasticity measures the responsiveness of quantity demanded to changes in consumer income?
Which type of elasticity measures the responsiveness of quantity demanded to changes in consumer income?
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What does a coefficient of elasticity less than 1 indicate about demand?
What does a coefficient of elasticity less than 1 indicate about demand?
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Which scenario describes unitary demand?
Which scenario describes unitary demand?
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Which of the following is a determinant of price elasticity?
Which of the following is a determinant of price elasticity?
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Which product is likely to have elastic demand?
Which product is likely to have elastic demand?
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When the elasticity coefficient equals 1, what happens to total revenue if price changes?
When the elasticity coefficient equals 1, what happens to total revenue if price changes?
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Which of the following statements about inelastic demand is true?
Which of the following statements about inelastic demand is true?
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If the percentage of household income spent on a product is high, what effect does it have on price elasticity?
If the percentage of household income spent on a product is high, what effect does it have on price elasticity?
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For which of these products would you expect a coefficient of elasticity to be less than 1?
For which of these products would you expect a coefficient of elasticity to be less than 1?
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Study Notes
Elasticity of Demand
- Price elasticity of demand measures how responsive quantity demanded is to a change in price
- Formula: Ep = %Δ quantity demanded / %Δ price
- Coefficient of elasticity (ε) is an absolute number, the sign is ignored
- Inelastic demand: Quantity demanded is not very responsive to a price change. Coefficient of elasticity is less than 1
- Elastic demand: Quantity demanded is quite responsive to a price change. Coefficient of elasticity is greater than 1
- Unitary demand: Percentage change in quantity demanded is equal to the percentage change in price. Coefficient of elasticity is equal to 1
- Determinants of price elasticity: Number of substitutes, percentage of income spent on the product, time period involved
Elasticity of Supply
- Elasticity of supply measures how responsive quantity supplied is to a change in price
- Formula: Es = %Δ quantity supplied / %Δ price
- Supply elasticity can vary over different time periods (market, short run, long run)
Income Elasticity
- Income elasticity measures how responsive quantity demanded is to a change in consumer income
- Formula: Ey = %Δ quantity demanded / %Δ income
- Positive income elasticity signifies a normal good.
- Goods can be luxury goods (Ey > 1) or necessities (0 < Ey < 1)
- Negative income elasticity identifies an inferior good (Ey < 0)
Cross-Price Elasticity
- Cross-price elasticity measures how responsive the quantity demanded of one good is to a change in the price of another good
- Formula: EAB = %Δ quantity demanded of good A / %Δ price of good B
- Positive cross-price elasticity suggests substitute goods
- Negative cross-price elasticity indicates complementary goods
Elasticity and Total Revenue
- Elastic demand: A price increase leads to a decrease in total revenue
- Inelastic demand: A price increase leads to an increase in total revenue
- Unitary elasticity: A price change does not affect total revenue
Key Concepts Summary
- Definition, calculation, and determinants of price elasticity of demand
- Difference between slope and elasticity
- Relationship between elasticity and total revenue
- Real-world examples of elasticity
- Elasticity of supply, income elasticity, and cross-elasticity of demand
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Description
This quiz focuses on the concepts of price elasticity of demand and supply. It explores the formulas, types of elasticity, and the factors that influence both demand and supply elasticity. Test your understanding of these key economic principles!
