Economics Module 5: Elasticity

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Questions and Answers

Which type of supply elasticity is characterized by the quantity supplied remaining unchanged despite price changes?

Perfectly Inelastic Supply (correct)

Unit Elastic Supply

Perfectly Elastic Supply

Inelastic Supply

What factor tends to make the supply of a product more elastic?

Excess production capacity (correct)

Limited availability of inputs

High initial production costs

Low production capacity

Which example best illustrates an inelastic supply?

Automobile manufacturing with adequate resources

Electronics production during peak demand

Wheat supply during the growing season (correct)

Soft drink production adjusting to seasonal trends

If a 20% increase in price leads to a 20% increase in quantity supplied, this type of elasticity is called what?

Unit Elastic Supply Signup and view all the answers

What generally happens to supply elasticity over time?

It becomes more elastic Signup and view all the answers

In which market condition is the supply considered perfectly elastic?

When supply can change drastically with minor price fluctuations Signup and view all the answers

Which condition is NOT a determinant of price elasticity of supply?

Consumer demand elasticity Signup and view all the answers

Which scenario best depicts the concept of perfectly inelastic supply?

The supply of rare art pieces remains constant despite price spikes Signup and view all the answers

Which type of goods is likely to have a more elastic supply?

Durable goods like cars and electronics Signup and view all the answers

What role does flexibility in the production process play in supply elasticity?

It allows firms to quickly adapt and produce different goods. Signup and view all the answers

How is Price Elasticity of Supply (PES) calculated?

Using the formula: PES = (% change in quantity supplied) / (% change in price) Signup and view all the answers

Why might a government impose price controls on essential goods?

To prevent producers from raising prices significantly when supply is inelastic. Signup and view all the answers

In which scenario is supply likely to be inelastic?

When crops are planted and require time to grow. Signup and view all the answers

What does a Price Elasticity of Supply (PES) of 1 indicate?

Unit elastic supply where percentage changes in quantity and price are proportional. Signup and view all the answers

How do firms use PES in their production decisions?

To determine how much to increase production in response to price rises. Signup and view all the answers

Which of the following best explains the impact of supply elasticity on market predictions?

High elastic supply means markets can adjust quickly to unexpected shocks. Signup and view all the answers

What happens to demand when the price of a product rises from $10 to $12 and the quantity demanded falls from 100 units to 80 units?

Demand is unit elastic. Signup and view all the answers

How can businesses utilize price elasticity of demand to maximize revenue?

Lower prices for elastic goods. Signup and view all the answers

Which of the following goods is likely to be taxed by the government due to its inelastic demand?

Cigarettes Signup and view all the answers

What does a Price Elasticity of Supply (PES) value greater than 1 indicate?

Supply is elastic. Signup and view all the answers

If consumers react strongly to price changes, how is the demand for that product characterized?

Elastic. Signup and view all the answers

What is the implication of having an elastic demand for a business during pricing strategy?

Lowering prices will attract more customers. Signup and view all the answers

Which of the following best describes a scenario where demand is inelastic?

Consumers continue to buy despite price increases. Signup and view all the answers

What does a PED of -1 signify about the relationship between price and quantity demanded?

Demand is unit elastic. Signup and view all the answers

What does elasticity measure in economics?

Sensitivity of quantity demanded or supplied to changes in variables Signup and view all the answers

Which of the following factors is least likely to influence elasticity?

Market competition level Signup and view all the answers

What type of goods do governments often target for taxation due to their inelastic demand?

Inelastic goods like cigarettes Signup and view all the answers

What does a Price Elasticity of Demand (PED) value greater than 1 indicate?

Demand is elastic Signup and view all the answers

Why do luxury goods like designer handbags have elastic demand?

They are easily substituted with other products Signup and view all the answers

In which scenario would price elasticity of demand (PED) likely be higher?

Goods with many available substitutes Signup and view all the answers

What does inelastic demand imply about consumer behavior?

Quantity demanded does not change significantly with price changes Signup and view all the answers

How does the elasticity of demand change over time?

Elasticity tends to be higher in the long run Signup and view all the answers

What does Income Elasticity of Demand (YED) measure?

The responsiveness of the quantity demanded for a good to a change in consumer income Signup and view all the answers

Which of the following indicates that a good is considered a luxury?

YED > 1 Signup and view all the answers

What happens to the demand for inferior goods as income increases?

Demand decreases as consumers shift to better alternatives Signup and view all the answers

What does Cross Elasticity of Demand (XED) indicate when it is greater than zero?

The goods are substitutes Signup and view all the answers

During economic growth, what might a business expect regarding demand for luxury goods?

Demand for luxury goods will increase Signup and view all the answers

If the price of tea increases causing an increase in the demand for coffee, what does this indicate about the relationship between these products?

They are substitutes Signup and view all the answers

How is a good classified if its YED is between 0 and 1?

Normal good Signup and view all the answers

What does it mean if the YED of a product is negative?

The product is an inferior good Signup and view all the answers

Study Notes

Overview of Elasticity

Elasticity measures sensitivity of quantity demanded/supplied to changes in price or other factors.
Types of elasticity include Price Elasticity of Demand (PED), Income Elasticity of Demand, Price Elasticity of Supply (PES), and Cross Elasticity of Demand.

Importance of Elasticity

Essential for businesses and policymakers to understand consumer and producer behavior.
Helps in setting pricing strategies and predicting effects of economic policies.
Inelastic goods (like cigarettes) are taxed to ensure stable revenue despite price increases.

Factors Influencing Elasticity

Availability of Substitutes: More substitutes lead to more elastic demand.
Time Frame: Long-term elasticity is often higher due to behavioral adjustments.
Proportion of Income: Goods consuming a large income portion (e.g., housing) have more elastic demand.

Price Elasticity of Demand (PED)

PED quantifies demand's responsiveness to price changes.
Elastic Demand (PED > 1): Consumers are very responsive to price changes (e.g., luxury goods).
Inelastic Demand (PED < 1): Consumers are less responsive to price changes (e.g., short-term gas price increases).
Calculating PED: Example: Price rises from 10to10 to 10to12; quantity demanded falls from 100 to 80 units, resulting in a PED of -1 (unit elastic).

Applications of Price Elasticity of Demand

Business Pricing Strategy: Companies adjust prices based on elasticity to optimize revenue.
Taxation Policy: Governments tax inelastic goods for stable tax revenue as consumption remains relatively unchanged.

Price Elasticity of Supply (PES)

PES measures how responsive quantity supplied is to price changes.
Elastic Supply (PES > 1): Producers can quickly increase output with price increases (e.g., electronics).
Inelastic Supply (PES < 1): Producers struggle to increase output in response to price changes (e.g., agriculture).
Unit elastic supply occurs when a percentage change in price equates to the same percentage change in quantity supplied (PES = 1).
Perfectly elastic supply means infinite responsiveness to price changes, while perfectly inelastic supply means quantity remains fixed regardless of price.

Determinants of Price Elasticity of Supply

Availability of Inputs: Readily available inputs lead to more elastic supply.
Time Period: Longer time frames allow firms to adjust supply more effectively.
Spare Production Capacity: Firms with excess capacity can respond quickly to price changes.
Storage Ability: Goods that can be easily stored have more elastic supply.
Flexibility of Production Process: Adaptable production systems allow for greater elasticity.

Applications of Price Elasticity of Supply

Business Production Decisions: Firms assess how to adjust production with price changes based on PES.
Government Policy: PES informs tax and price control policy decisions.
Market Prediction: Understanding PES is vital for anticipating market adjustments in response to external shocks.

Other Types of Elasticity

Income Elasticity of Demand (YED): Measures how demand changes with consumer income.
- YED > 1: Luxury goods; YED between 0 and 1: Normal goods; YED < 0: Inferior goods.
Cross Elasticity of Demand (XED): Measures demand change of one good in response to the price change of another.
- XED > 0 indicates substitute goods; if XED < 0, goods are complements.

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Description

This quiz focuses on Module 5 of the Bachelor of Science in Business Administration course, covering the concept of elasticity in economics. Explore how quantity demanded or supplied responds to changes in price and other factors, and test your understanding of this critical economic principle.