Week 4: Elasticity

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Questions and Answers

What best describes a demand curve that is elastic?

An increase in price leads to a significant decrease in quantity demanded. (correct)

An increase in price does not affect quantity demanded at all.

An increase in price leads to an increase in quantity demanded.

An increase in price leads to a minor decrease in quantity demanded.

What is true about the price elasticity of supply?

It measures how responsive the quantity supplied is to price changes. (correct)

It only applies to luxury goods and not necessities.

It remains constant regardless of market conditions.

It indicates how much demand changes when prices rise.

How do linear demand or supply curves compare if they pass through the same point?

Both curves have the same elasticity at that point.

The curve that is steeper is more elastic.

The elasticity cannot be determined without more information.

The curve that is flatter is more elastic. (correct)

Which factor does NOT influence the price elasticity of demand?

Government regulations on production. Signup and view all the answers

What happens when demand is inelastic?

Quantity demanded remains relatively unchanged despite price increases. Signup and view all the answers

What does it indicate if the price elasticity of demand is less than 1?

Demand is inelastic. Signup and view all the answers

What happens in the case of perfectly elastic demand?

Any price increase results in zero quantity demanded. Signup and view all the answers

How is total revenue affected if demand is elastic?

Total revenue decreases with a price increase. Signup and view all the answers

In the calculation of price elasticity of demand, how is the percentage change in quantity demanded calculated?

(New quantity - Original quantity) / Original quantity. Signup and view all the answers

Which of the following statements is true regarding unit-elastic demand?

The price elasticity of demand exactly equals 1. Signup and view all the answers

If the price of a good rises and the demand is inelastic, what is the likely effect on total revenue?

Total revenue will increase. Signup and view all the answers

What is an indication of price inelastic demand?

The percentage change in quantity demanded is less than the percentage change in price. Signup and view all the answers

Why do economists estimate price elasticity of demand?

To understand and predict market outcomes. Signup and view all the answers

What components contribute to the overall impact on total revenue when a seller raises prices?

Price effect and quantity effect Signup and view all the answers

For a good with unit-elastic demand (price elasticity of demand = 1), how does a price increase affect total revenue?

Total revenue remains the same Signup and view all the answers

What is the price elasticity of demand if a price increase leads to a total revenue drop?

Elastic demand (elasticity > 1) Signup and view all the answers

At a price of €1.10 and with inelastic demand, how much total revenue is generated when the quantity sold is 950?

€1,045 Signup and view all the answers

What happens to total revenue if the price of a good with elastic demand increases?

Total revenue decreases Signup and view all the answers

How is total revenue calculated using price and quantity sold?

Total Revenue = Price × Quantity Sold Signup and view all the answers

If the price elasticity of demand is less than 1, what type of demand is it considered?

Inelastic demand Signup and view all the answers

What is the total revenue when the price is set at €0.90 for 1,200 units with elastic demand?

€1,080 Signup and view all the answers

When demand is perfectly inelastic, what will happen to total revenue if the price increases?

Total revenue increases Signup and view all the answers

If the quantity sold at a price of €0.90 is 1,100, what is the total revenue?

€990 Signup and view all the answers

What does price elasticity of demand measure?

The response of quantity demanded to price changes Signup and view all the answers

If the price of a vaccination rises from €20 to €21 and the quantity demanded falls from 10 million to 9.9 million, what is the percentage change in quantity demanded?

-1% Signup and view all the answers

Using the information provided, what is the calculated price elasticity of demand based on the changes described?

-0.2 Signup and view all the answers

Why is the midpoint method preferred when calculating the price elasticity of demand?

It provides a standard result regardless of direction of price change. Signup and view all the answers

When calculating % change in price using the example given, what is the % change when price rises from €20 to €21?

5% Signup and view all the answers

What formula is used to compute the average value in the midpoint method?

(Starting value + Final value) / 2 Signup and view all the answers

What issue does the midpoint method address when calculating price elasticity of demand?

Choice of starting point for percentage changes Signup and view all the answers

What does a price elasticity of demand of -0.2 indicate?

Demand is inelastic. Signup and view all the answers

If the price of vaccinations increases by 5% and the quantity demanded decreases by 1%, what would the price elasticity of demand be?

-0.2 Signup and view all the answers

Which of the following best describes the quantity demanded in relation to price changes?

Quantity demanded decreases as price increases. Signup and view all the answers

Study Notes

Total Revenue

Total revenue earned by a seller is calculated by multiplying price per unit by the total quantity sold
Total revenue is influenced by both price and quantity sold

Elasticity and Total Revenue

Price Elasticity of Demand measures the responsiveness of quantity demanded to changes in price
Total revenue can be influenced by two opposing effects when price changes
- Price effect: Increasing price increases revenue per unit sold
- Quantity effect: Increasing price decreases total quantity sold
The overall impact of price change on total revenue depends on the relative strength of these two effects

Effect of Price Increase on Total Revenue

When demand is elastic, an increase in price leads to a decrease in total revenue (quantity effect dominates price effect)
When demand is inelastic, an increase in price leads to an increase in total revenue(price effect dominates quantity effect)
When demand is unit elastic, an increase in price has no impact on total revenue (price effect and quantity effect perfectly offset each other)

Price Elasticity of Demand

Price Elasticity of Demand measures how much quantity demanded responds to price changes
A more elastic demand curve implies a larger change in quantity demanded for a given price change
Elasticity Rule: For two linear demand/supply curves passing through the same point, the flatter curve is more elastic
The midpoint formula is used to calculate the price elasticity of demand and ensures consistent results regardless of the direction of the change

Interpreting Price Elasticity of Demand

Perfectly inelastic demand means quantity demanded does not change with price changes, represented by a vertical demand curve
Perfectly elastic demand means any price increase results in zero quantity demanded, represented by a horizontal demand curve
Elastic demand means a percentage change in price leads to a larger percentage change in quantity demanded
Inelastic demand means a percentage change in price leads to a smaller percentage change in quantity demanded
Unit-elastic demand means a percentage change in price leads to an equal percentage change in quantity demanded

Estimating Elasticities

Understanding price elasticity of demand is crucial for predicting market outcomes and for decision-making by producers.
Economists and market analysts use various methods to estimate price elasticity of demand.

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Description

This quiz covers the concepts of total revenue, elasticity of demand, and the effects of price changes on total revenue. It explores how total revenue is calculated and the impact of price elasticity on revenue changes. Test your understanding of how quantity demanded responds to pricing dynamics.