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What does a price elasticity of supply (PES) value of 0 indicate?
What does a price elasticity of supply (PES) value of 0 indicate?
Which factor contributes to a more elastic supply over time?
Which factor contributes to a more elastic supply over time?
What effect does an increase in price have on a perfectly elastic supply?
What effect does an increase in price have on a perfectly elastic supply?
In which type of supply does a slight increase in price cause a significant increase in quantity supplied?
In which type of supply does a slight increase in price cause a significant increase in quantity supplied?
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How is unit elastic supply defined?
How is unit elastic supply defined?
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What does a price elasticity of supply (PES) value greater than 1 indicate?
What does a price elasticity of supply (PES) value greater than 1 indicate?
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What is the implication of a PES value of infinity?
What is the implication of a PES value of infinity?
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What scenario would lead to a weak response to price changes in supply?
What scenario would lead to a weak response to price changes in supply?
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What does an increase in price with a decrease in quantity demanded while total revenue rises indicate about the demand curve?
What does an increase in price with a decrease in quantity demanded while total revenue rises indicate about the demand curve?
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Which calculation method uses the average of the initial and final quantities and prices?
Which calculation method uses the average of the initial and final quantities and prices?
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In which scenario would you expect a product to have more elastic demand?
In which scenario would you expect a product to have more elastic demand?
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What happens to the total revenue if demand is elastic and the price decreases?
What happens to the total revenue if demand is elastic and the price decreases?
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Which of the following characteristics would indicate goods with inelastic demand?
Which of the following characteristics would indicate goods with inelastic demand?
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If a good has a price elasticity of demand of less than 1, what does this imply?
If a good has a price elasticity of demand of less than 1, what does this imply?
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For which of the following pairs of goods would you expect Beethoven recordings to have more elastic demand?
For which of the following pairs of goods would you expect Beethoven recordings to have more elastic demand?
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What mathematical expression represents the calculation of total revenue?
What mathematical expression represents the calculation of total revenue?
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What does the term 'price elasticity of demand' refer to?
What does the term 'price elasticity of demand' refer to?
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Which of the following factors makes demand more elastic?
Which of the following factors makes demand more elastic?
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If a product has a price elasticity of demand (PED) of 0, what type of demand does it represent?
If a product has a price elasticity of demand (PED) of 0, what type of demand does it represent?
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Why might goods like newspapers have price inelastic demand?
Why might goods like newspapers have price inelastic demand?
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What happens to quantity demanded when price increases in the context of price elasticity of demand?
What happens to quantity demanded when price increases in the context of price elasticity of demand?
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Which of the following indicates a demand curve that is perfectly elastic?
Which of the following indicates a demand curve that is perfectly elastic?
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What effect does the availability of close substitutes have on elasticity of demand?
What effect does the availability of close substitutes have on elasticity of demand?
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If the price change leads to a change in quantity demanded that is equal in percentage, what is the elasticity of demand?
If the price change leads to a change in quantity demanded that is equal in percentage, what is the elasticity of demand?
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What is the price elasticity of demand (PED) for business travelers?
What is the price elasticity of demand (PED) for business travelers?
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Which factor contributes to the elasticity of demand for vacationers being higher than for business travelers?
Which factor contributes to the elasticity of demand for vacationers being higher than for business travelers?
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Why is demand for business travelers considered inelastic?
Why is demand for business travelers considered inelastic?
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What is a likely consequence of rising ticket prices for vacationers?
What is a likely consequence of rising ticket prices for vacationers?
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What distinguishes the timing flexibility of business travelers from that of vacationers?
What distinguishes the timing flexibility of business travelers from that of vacationers?
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Comparing the elasticity of demand for leisure travelers to that of business travelers, what trend is observed?
Comparing the elasticity of demand for leisure travelers to that of business travelers, what trend is observed?
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Which calculation method is used to determine the price elasticity of demand?
Which calculation method is used to determine the price elasticity of demand?
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What is indicated by a price elasticity of demand (PED) of -1.29 for vacationers?
What is indicated by a price elasticity of demand (PED) of -1.29 for vacationers?
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What happens to the demand for Beethoven recordings if their price increases?
What happens to the demand for Beethoven recordings if their price increases?
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How does the demand for classical music recordings compare to that of specific composers like Beethoven?
How does the demand for classical music recordings compare to that of specific composers like Beethoven?
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Using the midpoint method, what is the value indicating unit elastic supply for wheat?
Using the midpoint method, what is the value indicating unit elastic supply for wheat?
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If the price of wheat increases from $4.00 to $5.00 and supply increases from 1,200 to 1,500 bushels, what does this indicate?
If the price of wheat increases from $4.00 to $5.00 and supply increases from 1,200 to 1,500 bushels, what does this indicate?
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As ticket prices rise from $200 to $250, what is most likely true about business travelers' price elasticity of demand?
As ticket prices rise from $200 to $250, what is most likely true about business travelers' price elasticity of demand?
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Why might vacationers display different price elasticity from business travelers?
Why might vacationers display different price elasticity from business travelers?
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What impact does the availability of substitutes have on the elasticity of demand?
What impact does the availability of substitutes have on the elasticity of demand?
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When considering the overall demand for classical music, how does it compare in elasticity to the demand for individual composers?
When considering the overall demand for classical music, how does it compare in elasticity to the demand for individual composers?
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What does an income elasticity of demand of 2.5 for GOLF cars imply about their status?
What does an income elasticity of demand of 2.5 for GOLF cars imply about their status?
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If the price of printer ink increases by 20%, what is the expected effect on the quantity demanded for printers?
If the price of printer ink increases by 20%, what is the expected effect on the quantity demanded for printers?
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What does a cross-price elasticity of -0.5 suggest about the relationship between printer ink and printers?
What does a cross-price elasticity of -0.5 suggest about the relationship between printer ink and printers?
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Which statement is true regarding the elasticity of necessities and luxury goods?
Which statement is true regarding the elasticity of necessities and luxury goods?
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In the scenario where the quantity sold of coffee remained the same despite a price increase, what explanation is made by Raj?
In the scenario where the quantity sold of coffee remained the same despite a price increase, what explanation is made by Raj?
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What is the implication of having a negative income elasticity?
What is the implication of having a negative income elasticity?
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If a good has a cross-price elasticity of 0.3 with another good, how are these goods related?
If a good has a cross-price elasticity of 0.3 with another good, how are these goods related?
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Which of the following is true about the relationship between supply and demand in terms of elasticity?
Which of the following is true about the relationship between supply and demand in terms of elasticity?
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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
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Measures how much the quantity demanded of a good changes in response to a change in the good's price.
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Higher prices usually lead to less demand for a good.
Determinants of Elasticity of Demand
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Availability of close substitutes: Goods with many close substitutes tend to have more elastic demand; consumers can easily switch to alternatives if the price rises.
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Degree of necessity: Essential goods (necessities) have less elastic demand; consumers will continue to buy them even if the price increases.
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Definition of market: Narrowly defined markets (e.g., specific brand of food) generally have more elastic demand than broadly defined markets (e.g., all food).
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Time horizon: Demand is more elastic over longer time horizons; consumers have more time to find substitutes or adjust their behavior.
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Proportion of income spent: Goods that account for a larger portion of a consumer's income tend to have more elastic demand (e.g., expensive items like cars compared to necessities like salt.)
Types of Demand
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Perfectly Inelastic: Quantity demanded does not change at all when the price changes (PED = 0).
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Inelastic: Quantity demanded changes less than proportionally to a change in price (PED < 1).
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Unit Elastic: Quantity demanded changes by the same percentage as the price change (PED = 1).
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Elastic: Quantity demanded changes more than proportionally to a change in price (PED > 1).
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Perfectly Elastic: Quantity demanded changes infinitely when price changes (PED = ∞).
Price Elasticity of Supply
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Measures how much the quantity supplied of a good responds to a change in the price of that good.
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Higher prices usually mean more supply for a good.
Determinants of Elasticity of Supply
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Time Horizon: Supply is more elastic in the long run; firms have more time to adjust production processes.
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Availability of Resources: Goods with readily available resources to adjust production have more elastic supply.
Types of Supply
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Perfectly Inelastic: Quantity supplied does not change at all when price changes (PES = 0).
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Inelastic: Quantity supplied changes less than proportionally to a change in price (PES < 1).
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Unit Elastic: Quantity supplied changes by the same percentage as the price change (PES = 1).
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Elastic: Quantity supplied changes more than proportionally to a change in price (PES > 1).
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Perfectly Elastic: Quantity supplied changes infinitely when the price changes (PES = ∞).
Calculating Price Elasticity of Demand (PED) or Price Elasticity of Supply (PES)
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Percentage change method:
- PED or PES = [(New Quantity – Old Quantity) / Old Quantity] / [(New Price - Old Price) / Old Price] * 100
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Midpoint method:
- PED or PES = [(Q₂ - Q₁)/((Q₂ + Q₁) / 2)] / [(P₂ - P₁)/((P₂ + P₁) / 2)]
Elasticity and Total Revenue (TR)
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Inelastic Demand: Increasing price increases total revenue.
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Elastic Demand: Decreasing price increases total revenue.
Other Important Elasticities
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Income Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in income.
- Inferior goods: Negative income elasticity (e.g., cheaper foods).
- Normal goods: Positive income elasticity; necessities have elasticities less than 1 and luxuries have elasticities greater than 1.
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Cross-price Elasticity of Demand: Measures the responsiveness of quantity demanded of one good to a change in the price of a related good.
- Substitute goods: Positive cross-price elasticity (e.g., Coke and Pepsi).
- Complementary goods: Negative cross-price elasticity (e.g., printers and ink).
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Test your understanding of price elasticity of supply with this informative quiz. Explore key concepts, definitions, and implications of supply elasticity. Perfect for economics students looking to deepen their comprehension of market behaviors.
