Elasticity and Its Determinants
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Elasticity and Its Determinants

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Questions and Answers

What does elasticity measure in economics?

  • The relationship between supply and demand
  • The impact of consumer preferences
  • The responsiveness of quantity demanded or supplied to its determinants (correct)
  • The overall market value of a good

    • If the price elasticity of demand (Ed) is less than 1, demand is considered elastic.

    False

    What is the formula for price elasticity of demand (Ed)?

    %∆Qd / %∆P

    If a good is a __________, its price elasticity of demand is likely to be elastic.

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

    Which of the following is a determinant of price elasticity of demand?

    <p>Availability of close substitutes</p> Signup and view all the answers

    Match the elasticity type with its formula:

    <p>Price Elasticity of Demand = %∆Qd / %∆P Income Elasticity of Demand = %∆Qd / %∆I Cross-Price Elasticity of Demand = %∆QdX / %∆PY Price Elasticity of Supply = %∆Qs / %∆P</p> Signup and view all the answers

    What type of elasticity measures the response in demand for one good when the price of another good changes?

    <p>Cross-Price Elasticity of Demand</p> Signup and view all the answers

    Price elasticity of supply is influenced by production flexibility.

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

    What does it mean if the price elasticity of demand is characterized by |EX,Y| > 1?

    <p>Demand is elastic</p> Signup and view all the answers

    If the price elasticity of demand is inelastic, reducing the price will lead to an increase in total revenue.

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

    What does the midpoint formula help avoid when calculating elasticity?

    <p>Different values depending on the direction of change.</p> Signup and view all the answers

    If |EX,Y| = 0, the demand is considered ___.

    <p>perfectly inelastic</p> Signup and view all the answers

    Match the following definitions with their corresponding elasticity types:

    <p>Perfectly elastic = |E<sub>X,Y</sub>| = ∞ Elastic = |E<sub>X,Y</sub>| &gt; 1 Unit elastic = |E<sub>X,Y</sub>| = 1 Inelastic = |E<sub>X,Y</sub>| &lt; 1</p> Signup and view all the answers

    When demand is unit elastic, a decrease in price will lead to:

    <p>No change in total revenue</p> Signup and view all the answers

    The side of the market that is less elastic bears a greater share of the tax burden.

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

    What primarily determines the division of the tax burden in a market?

    <p>The relative elasticity of supply and demand.</p> Signup and view all the answers

    A good tends to have a small price elasticity of demand if which of the following is true?

    <p>The good is a necessity.</p> Signup and view all the answers

    A linear demand curve is always elastic.

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

    What is the effect on total revenue if the price elasticity of demand is greater than one?

    <p>Total revenue decreases.</p> Signup and view all the answers

    An increase in grain supply will reduce total revenue if the demand curve is _____.

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

    Match the following price elasticity concepts with their descriptions:

    <p>Inelastic = Price elasticity of demand less than 1 Elastic = Price elasticity of demand greater than 1 Unit elastic = Price elasticity of demand equal to 1 Perfectly inelastic = Demand does not change regardless of price</p> Signup and view all the answers

    A vertical supply curve indicates what about the price elasticity of supply?

    <p>It is inelastic.</p> Signup and view all the answers

    An increase in a good's price will always lead to an increase in the quantity supplied.

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

    What does it imply if the price elasticity of supply is zero?

    <p>Supply is perfectly inelastic.</p> Signup and view all the answers

    Study Notes

    Elasticity

    • Elasticity measures how responsive quantity demanded or quantity supplied is to changes in its determinants.
    • Commonly used to assess the impact of changes in price, income, or other factors.

    Price Elasticity of Demand

    • Measures the percentage change in quantity demanded divided by the percentage change in price.
    • Formula: %∆Qd / %∆P
    • Demand is elastic if |Ed| > 1.
    • Demand is inelastic if |Ed| < 1.
    • Demand is unit elastic if |Ed| = 1.

    Determinants of Price Elasticity of Demand

    • Availability of close substitutes
    • Necessities vs. luxuries
    • Defining the market broadly or narrowly
    • Time horizon

    Other Elasticities

    • Income Elasticity of Demand: Measures how quantity demanded changes with consumer income.
      • Formula: %∆Qd / %∆I
    • Cross-Price Elasticity of Demand: Measures the response in the demand for one good when the price of another good changes.
      • Formula: %∆QdX / %∆PY

    Price Elasticity of Supply

    • Measures how much quantity supplied responds to changes in price.
    • Formula: %∆Qs / %∆P
    • Determinants include production flexibility and time horizon.

    Calculating Elasticity: Midpoint Formula

    • To avoid different values depending on the direction of change, use the midpoint formula:
      • Ed = (Q2 - Q1) / ((Q2 + Q1)/2) / (P2 - P1) / ((P2 + P1)/2)

    Price Elasticity of Demand: Total Revenue Rule

    • Total Revenue (TR) = P × Q
    • Quantity Effect: More units are sold when the price decreases
    • Price Effect: Lower revenue from units sold when the price decreases

    Elasticity and Price-Quantity Tradeoff

    • When Ed is elastic, Quantity Effect dominates.
    • When Ed is unit elastic, two effects cancel out.
    • When Ed is inelastic, Price Effect dominates.

    Total Revenue Rule

    • If Ed is elastic: Price decreases → Total Revenue increases.
    • If Ed is unit elastic: Price decreases → Total Revenue does not change.
    • If Ed is inelastic: Price decreases → Total Revenue decreases.

    Elasticity and Tax Incidence

    • The division of the tax burden depends on the relative elasticity of supply and demand.
    • The side of the market that is less elastic bears a greater share of the tax burden.

    Elasticity and Surplus

    • The side of the market with more inelastic demand or supply bears more burden of the tax and enjoys more benefit of the subsidy.
    • After a tax (subsidy), there is a fixed decrease (increase) in quantity.
    • If one side is more inelastic, they lose (gain) more per unit.

    Comparing Price Elasticity of Two Intersecting Curves

    • Start from the intersection point.
    • Draw a fixed change in price level.
    • A larger change in quantity implies more price elasticity.

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    Elasticity And Its Applications (PDF)

    Description

    This quiz explores the concept of elasticity in economics, focusing on the price elasticity of demand and supply. Learn about the formulas for measuring elasticity and the various factors that influence it, such as substitutes and consumer income. Test your understanding of how these concepts apply in real-world scenarios.

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