Elasticity and Price Elasticity of Demand

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Questions and Answers

What does elasticity measure in economics?

The responsiveness of quantity demanded or supplied (correct)
The total revenue from sales
The overall market demand for a good
The profitability of a good

Which of the following describes elastic demand?

Quantity demanded responds significantly to price changes (correct)
Quantity demanded remains constant despite price fluctuations
Quantity demanded changes minimally with price changes
Quantity demanded does not change regardless of price

What is a key factor that makes demand more elastic?

Availability of close substitutes (correct)
High price levels
Short-term purchasing decisions
Limited consumer preferences

How is the price elasticity of demand calculated?

Percentage change in quantity demanded divided by percentage change in price (D) Signup and view all the answers

Necessities typically have what type of demand?

Inelastic demand (C) Signup and view all the answers

Which type of goods would likely exhibit more elastic demand?

Luxury items like designer handbags (A) Signup and view all the answers

What characterizes inelastic demand?

Little to no response to price changes (D) Signup and view all the answers

When would demand be considered perfectly inelastic?

When quantity demanded remains constant despite price changes (D) Signup and view all the answers

Which market definition typically results in more elastic demand?

Narrowly defined markets (B) Signup and view all the answers

In which time horizon is demand likely to be more elastic?

Long-term horizon (C) Signup and view all the answers

How do you compute the price elasticity of demand using the midpoint method?

Using the absolute values of quantities and prices (B) Signup and view all the answers

What indicates that demand is elastic?

Price elasticity of demand > 1 (B) Signup and view all the answers

What happens to total revenue when demand is inelastic and price increases?

Total revenue increases (A) Signup and view all the answers

If demand is inelastic, what happens to total revenue when price increases?

Total revenue increases (B) Signup and view all the answers

Which of the following statements is true for demand that is elastic?

Total revenue decreases when price increases (C) Signup and view all the answers

What is the correct formula for calculating the price elasticity of demand?

Percentage change in quantity divided by percentage change in price (B) Signup and view all the answers

What is the income elasticity of demand for normal goods?

Positive (A) Signup and view all the answers

What characterizes a demand curve with unit elasticity?

Price elasticity of demand is equal to 1 (D) Signup and view all the answers

Which situation does not occur when demand is considered inelastic?

TR decreases with a price increase (D) Signup and view all the answers

What type of goods have a negative income elasticity?

Inferior goods (A) Signup and view all the answers

Which term describes the elasticity that measures how quantity demanded of one good responds to a change in price of another good?

Cross-price elasticity of demand (C) Signup and view all the answers

What characterizes substitutes in terms of cross-price elasticity?

Positive cross-price elasticity (A) Signup and view all the answers

What kind of goods typically have smaller income elasticities?

Necessities (B) Signup and view all the answers

When demand is unit elastic, what happens to total revenue when price changes?

Total revenue remains constant (A) Signup and view all the answers

What does price elasticity of supply measure?

The responsiveness of quantity supplied to changes in the price of the good (B) Signup and view all the answers

What type of supply is characterized by a quantity supplied that responds slightly to price changes?

Inelastic supply (B) Signup and view all the answers

Which factor primarily influences the price elasticity of supply?

The flexibility of sellers to change production (D) Signup and view all the answers

In which time period is supply generally more elastic?

Long run (B) Signup and view all the answers

What does a price elasticity of supply value greater than 1 signify?

Supply is elastic. (D) Signup and view all the answers

How is price elasticity of supply calculated using the midpoint method?

(Q2 - Q1) / [(Q2 + Q1) / 2] (B) Signup and view all the answers

What is a characteristic of unit elastic supply?

Price elasticity of supply equals one (D) Signup and view all the answers

What does it mean if price elasticity of supply is less than 1?

Supply is inelastic. (B) Signup and view all the answers

Study Notes

Elasticity

Elasticity measures the responsiveness of quantity demanded or quantity supplied to a change in its determinants.
Price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good.

Price Elasticity of Demand

The price elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in price.
Elastic demand occurs when the quantity demanded responds substantially to changes in price.
Inelastic demand occurs when the quantity demanded responds only slightly to changes in price.
Elasticity of demand depends on the availability of close substitutes.
Goods with close substitutes have more elastic demand.
Demand is more elastic over longer time horizons.

Computing Price Elasticity of Demand

Use the absolute value (drop the minus sign)
Two points are needed to compute the price elasticity with the midpoint method: (Q1, P1) and (Q2, P2).
To calculate the elasticity of demand using the midpoint method the following formula should be used:
```
                         (Q2  Q1 )/[(Q2  Q1 )/ 2 ]
```
Price elasticity of demand (P2  P1 )/[(P2  P1 )/ 2 ]

Types of Demand Curves

The price elasticity of demand is greater than 1 when the demand is elastic.
The price elasticity of demand is less than 1 when the demand is inelastic.
The price elasticity of demand is equal to 1 when the demand has unit elasticity.

Total Revenue

Total revenue is the amount paid by buyers and received by sellers of a good.
It is calculated by multiplying the price of a good by the quantity sold.
An increase in price will increase total revenue when demand is inelastic.
An increase in price will decrease total revenue when demand is elastic.

Changes in Total Revenue

If demand is inelastic (elasticity < 1) the price and total revenue move in the same direction.
If demand is elastic (elasticity > 1) the price and total revenue move in opposite directions.
Total revenue remains constant when the price changes if the demand is unit elastic (elasticity = 1).

Income Elasticity of Demand

The income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
It is calculated by dividing the percentage change in quantity demanded by the percentage change in income.

Normal Goods

Normal goods have a positive income elasticity.
Necessities have a smaller income elasticity than luxuries.

Inferior Goods

Inferior goods have a negative income elasticity.

Cross-Price Elasticity of Demand

The cross-price elasticity of demand measures how much the quantity demanded of one good responds to a change in the price of another good.
It is calculated by dividing the percentage change in quantity demanded of the first good by the percentage change in the price of the second good.

Substitutes and Complements

Substitutes are goods typically used in place of each other and have a positive cross-price elasticity.
Complements are goods that are typically used together and have a negative cross-price elasticity.

Price Elasticity of Supply

Price elasticity of supply measures how much the quantity supplied of a good responds to a change in the price of that good.
It is calculated by dividing the percentage change in quantity supplied by the percentage change in price.
The price elasticity of supply depends on the flexibility of sellers to change the amount of the good they produce.

Elastic and Inelastic Supply

Elastic supply occurs when the quantity supplied responds substantially to changes in price.
Inelastic supply occurs when the quantity supplied responds only slightly to changes in price.
Supply is more elastic in the long run.

Computing Price Elasticity of Supply

The percentage change in quantity supplied divided by the percentage change in price is used to calculate the price elasticity of supply.
The price elasticity of supply is always positive.
Two points are needed to compute the price elasticity with the midpoint method: (Q1, P1) and (Q2, P2).
To calculate the price elasticity of supply using the midpoint method the following formula should be used:
```
                          (Q2  Q1 ) / [(Q2  Q1 ) / 2 ]
```
Price elasticity of supply  (P2  P1 ) / [(P2  P1 ) / 2 ]

Types of Supply Curves

Supply is unit elastic when the price elasticity of supply is equal to one.
Supply is elastic when the price elasticity of supply is greater than one.
Supply is inelastic when the price elasticity of supply is less than one.

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Description

This quiz explores the concepts of elasticity, particularly focusing on the price elasticity of demand. It discusses how quantity demanded responds to price changes, the difference between elastic and inelastic demand, and methods for computing price elasticity. Test your understanding of these crucial economic concepts.