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What is elasticity?
What is elasticity?
Elasticity measures the responsiveness of quantity demanded or quantity supplied to one of its determinants.
What is the formula for price elasticity of demand?
What is the formula for price elasticity of demand?
Ed = %∆Qd / %∆P
If |Ed| > 1, what does this indicate about the demand?
If |Ed| > 1, what does this indicate about the demand?
Demand is considered inelastic when |Ed| < 1.
Demand is considered inelastic when |Ed| < 1.
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Which of the following is NOT a determinant of price elasticity of demand?
Which of the following is NOT a determinant of price elasticity of demand?
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What happens to the price elasticity of demand if the time frame is longer?
What happens to the price elasticity of demand if the time frame is longer?
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What is the formula for income elasticity of demand?
What is the formula for income elasticity of demand?
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What does it mean when elasticity is perfectly inelastic?
What does it mean when elasticity is perfectly inelastic?
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What is the total revenue rule for elastic demand?
What is the total revenue rule for elastic demand?
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The midpoint formula for calculating elasticity is (Q2 - Q1) / ((Q2 + Q1) / 2) for quantity and __________ for price.
The midpoint formula for calculating elasticity is (Q2 - Q1) / ((Q2 + Q1) / 2) for quantity and __________ for price.
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Study Notes
Elasticity
- Measures how quantity demanded or supplied responds to a change in a determinant, such as price, income, or other factors.
- Used to assess impact of changes in these determinants.
Price Elasticity of Demand
- Measures the percentage change in quantity demanded divided by the percentage change in price.
- Formula: Ed = %∆Qd / %∆P
- Elastic demand: |Ed| > 1: Quantity demanded changes more than price.
- Inelastic demand: |Ed| < 1: Quantity demanded changes less than price.
- Unit elastic demand: |Ed| = 1: Quantity demanded changes proportionally to price.
Determinants of Price Elasticity of Demand
- Availability of close substitutes: More substitutes, more elastic demand (e.g., Cabbage).
- Necessities vs. luxuries: Luxuries tend to have more elastic demand (e.g., Porsche), while necessities are inelastic (e.g., Salt).
- Defining the market broadly or narrowly: Narrower market, more elastic demand (e.g., brand of soda vs all soft drinks).
- Time horizon: Longer time horizon, more elastic demand (e.g., energy consumption).
Other Elasticities
- Income Elasticity of Demand:
- Measures how quantity demanded changes with consumer income.
- Formula: EI = %∆Qd / %∆I
- Cross-Price Elasticity of Demand:
- Measures the response in demand for one good when the price of another good changes.
- Formula: EXY = %∆QdX / %∆PY
Price Elasticity of Supply
- Measures how much quantity supplied responds to changes in price.
- Formula: Es = %∆Qs / %∆P
- Determinants include production flexibility and time horizon.
Elasticity Definitions
- Perfectly elastic: |EX ,Y |= ∞: Unlimited response to change in X.
- Elastic: |EX ,Y |> 1: Significant response to change in X.
- Unit elastic: |EX ,Y |= 1: Proportional response to change in X.
- Inelastic: |EX ,Y |< 1: Minimal response to change in X.
- Perfectly inelastic: |EX ,Y |= 0: No change in response to change in X.
Calculating Elasticity: Midpoint Formula
- The midpoint formula helps get consistent elasticity values regardless of direction of change.
- 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: When price decreases, more units are sold, increasing revenue.
- Price effect: When price decreases, revenue on each unit sold decreases.
- Total Revenue Rule:
- If Ed is elastic: Price decreases → TR increases.
- If Ed is unit elastic: Price decreases → TR does not change.
- If Ed is inelastic: Price decreases → TR decreases.
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Description
Explore the concepts of elasticity and its impact on demand and supply in this quiz. Understand key determinants of price elasticity of demand, such as availability of substitutes, necessity vs. luxury goods, and market definitions. Test your knowledge on how these factors influence consumer behavior.
