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?
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The greater the elasticity value, the more sensitive quantity demanded is to price.
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What is the midpoint formula?
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% change in price = _____
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% change in Q demanded = _____
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When do we use the midpoint formula?
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Perfectly inelastic demand has a price elasticity of 0.
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Inelastic demand has a price elasticity of demand between 0 and 1.
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Elastic demand has a price elasticity of demand greater than 1.
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Perfectly elastic demand has a price elasticity of demand approaching infinity.
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What is unit elastic demand?
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How does elasticity of demand vary along a straight-line demand curve?
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What is total revenue (TR) in a market?
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An _______ in price _____ total revenue when demand is inelastic, and _______ when demand is elastic.
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How do necessities compare to luxuries in terms of elasticity of demand?
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What is short-run elasticity?
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What is long-run elasticity?
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What is the relationship between time horizon and elasticity?
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What is income elasticity of demand?
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Income elasticity = _____
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What is cross-price elasticity of demand?
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What is price elasticity of supply?
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Long-run supply elasticities are greater than short-run supply elasticities.
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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!
