Elasticities and Price Elasticity of Demand
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Questions and Answers

What are elasticities?

Measures of the sensitivity of one variable to another.

What is the price elasticity of demand?

The sensitivity of quantity demanded to price.

Price Elasticity of Demand (E↓d) = _____

% change in quantity demanded // % change in price

What does the E↓D tell us?

<p>The percentage change in quantity demanded for each 1% change in price.</p> Signup and view all the answers

The greater the elasticity value, the more sensitive quantity demanded is to price.

<p>True</p> Signup and view all the answers

What is the midpoint formula?

<p>Divide the change by the average of its starting and ending values.</p> Signup and view all the answers

% change in price = _____

<p>(P1 - P0) / [(P1 + P0) / 2]</p> Signup and view all the answers

% change in Q demanded = _____

<p>(Q1 - Q0) / [(Q1 + Q0) / 2]</p> Signup and view all the answers

When do we use the midpoint formula?

<p>When calculating elasticity values from data on prices and quantities.</p> Signup and view all the answers

Perfectly inelastic demand has a price elasticity of 0.

<p>True</p> Signup and view all the answers

Inelastic demand has a price elasticity of demand between 0 and 1.

<p>True</p> Signup and view all the answers

Elastic demand has a price elasticity of demand greater than 1.

<p>True</p> Signup and view all the answers

Perfectly elastic demand has a price elasticity of demand approaching infinity.

<p>True</p> Signup and view all the answers

What is unit elastic demand?

<p>A price elasticity of demand equal to 1.</p> Signup and view all the answers

How does elasticity of demand vary along a straight-line demand curve?

<p>It becomes less elastic.</p> Signup and view all the answers

What is total revenue (TR) in a market?

<p>Price per unit (P) multiplied by the quantity that people buy (Q).</p> Signup and view all the answers

An _______ in price _____ total revenue when demand is inelastic, and _______ when demand is elastic.

<p>increase; raises; shrinks</p> Signup and view all the answers

How do necessities compare to luxuries in terms of elasticity of demand?

<p>Goods regarded as necessities have less elastic demand than goods regarded as luxuries.</p> Signup and view all the answers

What is short-run elasticity?

<p>An elasticity measured just a short time after a price change.</p> Signup and view all the answers

What is long-run elasticity?

<p>An elasticity measured a year or more after a price change.</p> Signup and view all the answers

What is the relationship between time horizon and elasticity?

<p>The longer the time horizon, the more elastic the demand.</p> Signup and view all the answers

What is income elasticity of demand?

<p>The percentage of change in quantity demanded caused by a 1 percent change in income.</p> Signup and view all the answers

Income elasticity = _____

<p>% change in Q demanded // % change in income</p> Signup and view all the answers

What is cross-price elasticity of demand?

<p>The percentage change in the quantity demanded of one good caused by a 1 percent change in the price of another good.</p> Signup and view all the answers

What is price elasticity of supply?

<p>The percentage change in quantity supplied of a good or service caused by a 1 percent change in its price.</p> Signup and view all the answers

Long-run supply elasticities are greater than short-run supply elasticities.

<p>True</p> Signup and view all the answers

Study Notes

Elasticities

  • Elasticities measure sensitivity of one variable in response to changes in another variable.

Price Elasticity of Demand (E↓d)

  • Represents the sensitivity of quantity demanded to price changes.
  • Calculated as the percentage change in quantity demanded due to a 1 percent change in price.

Price Elasticity of Demand Calculation

  • Formula: E↓d = % change in quantity demanded / % change in price.
  • Example: If E↓d = 3.0, a 1% drop in price leads to a 3% increase in quantity demanded.

Elasticity Interpretation

  • Greater elasticity values indicate higher sensitivity of quantity demanded to price changes.

Midpoint Formula

  • Used to calculate elasticities from data.
  • Change in variable is divided by the average of its starting and ending values to provide a more accurate measure.

Percentage Change Formulas

  • % change in price = (P1 - P0) / [(P1 + P0) / 2].
  • % change in quantity demanded = (Q1 - Q0) / [(Q1 + Q0) / 2].

Demand Elasticities

  • Perfectly inelastic demand: E↓d = 0, quantity demanded remains unchanged despite price changes.
  • Inelastic demand: E↓d between 0 and 1, quantity demanded changes less proportionately than price.
  • Elastic demand: E↓d > 1, quantity demanded changes more than proportionate to price.
  • Perfectly elastic demand: E↓d approaches infinity, buyers will only purchase at a specific price.
  • Unit elastic demand: E↓d = 1, percentage change in quantity demanded matches percentage change in price.

Elasticity Behavior on Demand Curves

  • Elasticity varies along a straight-line downward sloping demand curve, becoming less elastic as price decreases.

Total Revenue (TR) of Sellers

  • Calculated as TR = Price per unit (P) x Quantity sold (Q).
  • Price increases lead to a rise in total revenue when demand is inelastic, but a decrease when demand is elastic.

Necessities vs. Luxuries

  • Necessities typically exhibit less elastic demand compared to luxuries.

Time Horizon Effects on Elasticity

  • Short-run elasticity reflects immediate responses to price changes.
  • Long-run elasticity shows adjustments over a year or more; longer timeframes usually yield more elastic demand.

Income Elasticity of Demand

  • Indicates the percentage change in quantity demanded resulting from a 1 percent change in income, reflecting shifts in the demand curve.

Cross-Price Elasticity of Demand

  • Measures how the quantity demanded of one good changes in response to a 1 percent price change of another good.

Price Elasticity of Supply

  • Represents how quantity supplied responds to price changes, calculated similarly to price elasticity of demand.
  • Long-run supply elasticities tend to be greater than short-run elasticities, indicating producers adjust more over time.

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Description

This quiz covers the concept of elasticities, focusing particularly on the price elasticity of demand. You'll learn about the formula for calculating elasticity, how to interpret its values, and the midpoint method used for precise measurements. Test your understanding of these essential economic principles!

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