Elasticity Concepts in Economics
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Questions and Answers

What is the required percentage change in the price of cars to reduce the quantity demanded of gasoline by 50% given a cross-price elasticity of -5?

  • Decrease by 1%
  • Increase by 1%
  • Increase by 10% (correct)
  • Increase by 5%

    • What does a cross-price elasticity of demand indicate about two goods?

  • How responsive buyers are to a change in price
  • Whether they are complements or substitutes (correct)
  • How responsive sellers are to price changes
  • Whether they are normal goods or inferior goods

    • How can we describe the price elasticity of supply of raspberries over two days compared to two years?

  • Relatively elastic in two days; relatively inelastic in two years
  • Relatively inelastic in both two days and two years
  • Relatively inelastic in two days; relatively elastic in two years (correct)
  • Relatively more inelastic in two years than in two days

    • If the price of lemons increased by 10% and the price elasticity of supply of lemons is 2, what is the expected increase in quantity supplied?

    <p>20%; elastic</p> Signup and view all the answers

    When the percentage change in price is equal to the percentage change in quantity supplied, how is that elasticity characterized?

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

    What does a price elasticity of supply of 3.75 indicate about the behavior of suppliers?

    <p>For every 1% increase in price, 3.75% more cupcakes will be sold</p> Signup and view all the answers

    What does positive income elasticity of demand indicate about a good?

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

    How is income elasticity of demand calculated?

    <p>%∆Qd / %∆I</p> Signup and view all the answers

    What does a negative cross elasticity of demand indicate?

    <p>The goods are complements.</p> Signup and view all the answers

    Which of the following denotes perfectly inelastic supply?

    <p>Elasticity equals 0.</p> Signup and view all the answers

    If a good has an income elasticity of demand less than 1 but greater than 0, what type of good is it?

    <p>Normal good.</p> Signup and view all the answers

    In the context of price elasticity of supply, which option describes unit elasticity?

    <p>Elasticity equals 1.</p> Signup and view all the answers

    When the price of one substitute good increases, what happens to the demand for another substitute good?

    <p>Demand increases.</p> Signup and view all the answers

    What is the primary focus of price elasticity of supply?

    <p>Quantity supplied response to price changes.</p> Signup and view all the answers

    If the cross price elasticity of demand between two goods is positive, what does this suggest?

    <p>The goods are substitutes.</p> Signup and view all the answers

    If Burgin's income elasticity for instant noodles is -5, what is the expected change in his consumption when his income increases by 10%?

    <p>He will buy 50% fewer instant noodles.</p> Signup and view all the answers

    Which person's income elasticity suggests that they view veggie burgers as a normal luxury good?

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

    What happens to the elasticity of supply over time following a price change?

    <p>It increases the longer the time frame.</p> Signup and view all the answers

    Which of the following resources leads to a smaller elasticity of supply?

    <p>Rare resources needed for production.</p> Signup and view all the answers

    What type of good is Holly indicating if her income elasticity of demand for veggie burgers is 0.1?

    <p>Normal necessity</p> Signup and view all the answers

    Fred considers veggie burgers to be what type of good given his income elasticity of -0.5?

    <p>Inferior good</p> Signup and view all the answers

    Given the elasticity trends, which supply type is characterized by perfect inelasticity?

    <p>Momentary supply</p> Signup and view all the answers

    Which income elasticity value represents a person considering a good as inferior?

    <p>-2</p> Signup and view all the answers

    In terms of supply elasticity, which statement is correct about long-run supply?

    <p>It has the highest elasticity among time frames.</p> Signup and view all the answers

    What is the effect of resource substitution on the elasticity of supply?

    <p>It increases elasticity.</p> Signup and view all the answers

    Study Notes

    Income Elasticity of Demand

    • Measures how quantity demanded responds to income changes, other factors constant.
    • Calculated as: (%ΔQd) / (%ΔI)
    • Positive: Normal goods; demand increases with income.
      • Greater than 1: Income elastic (demand responds strongly to income changes)
      • Between 0 and 1: Income inelastic (demand responds less to income changes)
    • Negative: Inferior goods; demand decreases with income.

    Cross Elasticity of Demand

    • Measures demand responsiveness to price changes of substitutes / complements.
    • Calculated as: (%ΔQd) / (%ΔP of substitutes or complements)
    • Positive: Substitutes; price of one good increases, demand for other increases.
    • Negative: Complements; price of one good increases, demand for other decreases.

    Price Elasticity of Supply

    • Measures supply's responsiveness to price changes, other factors constant.
    • Calculated as: (%ΔQS) / (%ΔP)

    Types of Elasticity of Supply

    • Perfectly Elastic: Horizontal supply curve; infinite responsiveness to price changes.
    • Unit Elastic: Linear supply curve through the origin; %ΔQS equals %ΔP.
    • Perfectly Inelastic: Vertical supply curve; no responsiveness to price changes.

    Factors Influencing Elasticity of Supply

    • Time Frame: Longer time frames lead to greater elasticity.
    • Resource Substitution: More readily available resources lead to greater elasticity.

    Multiple Choice Questions

    • Question 1: Burgin's income elasticity for instant noodles is -5. If income increases by 10%, Burgin will buy 50% fewer instant noodles.
    • Question 2: Income elasticities for veggie burgers (Tracy: 3, Brian: 1, Fred: -0.5, Holly: 0.1, Melanie: -2 suggest differing classifications of the good.)
    • Question 3: To reduce gasoline demand by 50%, the price of cars must increase by 1%.
    • Question 4: Cross-price elasticity determines if goods are substitutes or complements and how responsive buyers are to price changes.
    • Question 5: Raspberries and strawberries have relatively inelastic supply for short term but relatively elastic supply over a long period.
    • Question 6: If lemon price increases by 10% and price elasticity of supply is 2, the quantity supplied will increase by 20%.
    • Question 7: When % change in price equals % change in quantity supplied this is called unit elastic.
    • Question 8: A price elasticity of supply of 3.75 means for every 1% increase in price, the quantity supplied increases by 3.75%.
    • Question 9: Price elasticity of supply measures how quantity supplied changes in response to a change in that good's price.

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    Description

    This quiz covers key concepts of elasticity in economics, including income elasticity, cross elasticity, and price elasticity. Understand how demand and supply respond to changes in income and prices while differentiating between normal and inferior goods. Test your knowledge of these important economic principles!

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