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What does elasticity measure in economics?
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.
If the price elasticity of demand (Ed) is less than 1, demand is considered elastic.
False (B)
What is the formula for price elasticity of demand (Ed)?
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.
If a good is a __________, its price elasticity of demand is likely to be elastic.
Which of the following is a determinant of price elasticity of demand?
Which of the following is a determinant of price elasticity of demand?
Match the elasticity type with its formula:
Match the elasticity type with its formula:
What type of elasticity measures the response in demand for one good when the price of another good changes?
What type of elasticity measures the response in demand for one good when the price of another good changes?
Price elasticity of supply is influenced by production flexibility.
Price elasticity of supply is influenced by production flexibility.
What does it mean if the price elasticity of demand is characterized by |EX,Y| > 1?
What does it mean if the price elasticity of demand is characterized by |EX,Y| > 1?
If the price elasticity of demand is inelastic, reducing the price will lead to an increase in total revenue.
If the price elasticity of demand is inelastic, reducing the price will lead to an increase in total revenue.
What does the midpoint formula help avoid when calculating elasticity?
What does the midpoint formula help avoid when calculating elasticity?
If |EX,Y| = 0, the demand is considered ___.
If |EX,Y| = 0, the demand is considered ___.
Match the following definitions with their corresponding elasticity types:
Match the following definitions with their corresponding elasticity types:
When demand is unit elastic, a decrease in price will lead to:
When demand is unit elastic, a decrease in price will lead to:
The side of the market that is less elastic bears a greater share of the tax burden.
The side of the market that is less elastic bears a greater share of the tax burden.
What primarily determines the division of the tax burden in a market?
What primarily determines the division of the tax burden in a market?
A good tends to have a small price elasticity of demand if which of the following is true?
A good tends to have a small price elasticity of demand if which of the following is true?
A linear demand curve is always elastic.
A linear demand curve is always elastic.
What is the effect on total revenue if the price elasticity of demand is greater than one?
What is the effect on total revenue if the price elasticity of demand is greater than one?
An increase in grain supply will reduce total revenue if the demand curve is _____.
An increase in grain supply will reduce total revenue if the demand curve is _____.
Match the following price elasticity concepts with their descriptions:
Match the following price elasticity concepts with their descriptions:
A vertical supply curve indicates what about the price elasticity of supply?
A vertical supply curve indicates what about the price elasticity of supply?
An increase in a good's price will always lead to an increase in the quantity supplied.
An increase in a good's price will always lead to an increase in the quantity supplied.
What does it imply if the price elasticity of supply is zero?
What does it imply if the price elasticity of supply is zero?
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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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