Elasticity in Economics

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What does elasticity measure in economics?

The responsiveness of quantity demanded or supplied to changes in price or other factors (correct)

The amount of goods supplied at a certain price

The total revenue generated from sales at varying prices

The change in consumer tastes and preferences over time

In the formula for price elasticity of demand (Ed), what do the variables % change in Qd and % change in P represent?

% change in quantity supplied and % change in price of related goods

% change in price of the good and % change in total revenue

% change in consumer income and % change in quantity supplied

% change in quantity demanded and % change in price of the good (correct)

If the price elasticity of demand for ice cream is calculated as 2, what does this imply?

For every 1% increase in price, quantity demanded decreases by 2%

For every 1% increase in price, quantity demanded increases by 2%

For every 1% change in price, quantity demanded changes by 2% in either direction (correct)

For every 1% decrease in price, quantity demanded increases by 2%

When a 10% increase in gasoline prices results in a 5% decrease in quantity demanded, what is the price elasticity of demand?

0.5 Signup and view all the answers

What action should a seller take if customers are highly responsive to price changes?

Decrease prices to attract more customers Signup and view all the answers

What characteristic does the price elasticity of demand (Ed) of a good display when it is greater than 1?

Demand is elastic Signup and view all the answers

What happens to total revenue when a firm raises prices for a good with an elasticity less than 1?

Total revenue increases Signup and view all the answers

What is indicated by a price elasticity of demand value less than 1?

Consumers are not very sensitive to price changes Signup and view all the answers

What is the calculated elasticity of demand (Ed) between points A and B?

2.33 Signup and view all the answers

How does a decrease in price affect total revenue when demand is elastic?

Total revenue increases. Signup and view all the answers

Which statement is true regarding the elasticity of demand as price changes?

Demand is elastic at high prices. Signup and view all the answers

What is one key determinant of the elasticity of demand?

Availability of substitutes. Signup and view all the answers

How does the time horizon affect elasticity of demand?

Longer time horizons generally increase elasticity. Signup and view all the answers

What occurs between points C and D regarding total revenue?

Total revenue increases. Signup and view all the answers

Which of the following best describes the relationship between price and quantity demanded at point A?

Lower price leads to higher quantity demanded. Signup and view all the answers

What implication does a high elasticity of demand have for businesses?

Price changes significantly affect revenue. Signup and view all the answers

What happens to the market elasticity when the scope of the market is considered more narrowly?

Elasticity increases Signup and view all the answers

Which type of good typically has a negative income elasticity?

Inferior goods Signup and view all the answers

How do consumers typically respond to price changes in necessities compared to luxury items?

Less responsive to necessities Signup and view all the answers

If the price of only Cheerios increases, what is likely to happen to consumer behavior?

Consumers will switch to other cereals Signup and view all the answers

In terms of income elasticity, what characterizes luxury goods compared to necessities?

Positive elasticity is higher for luxuries Signup and view all the answers

What is the primary factor affecting the elasticity of demand in the market?

Availability of substitutes Signup and view all the answers

Which of the following statements is true regarding the demand for luxury items?

Demand is highly elastic Signup and view all the answers

Which statement accurately describes the concept of income elasticity of demand?

It can be defined as the percentage change in quantity demanded divided by the percentage change in income Signup and view all the answers

What does an Ed value of less than 1 indicate about consumer behavior?

Consumers are not responsive to price changes. Signup and view all the answers

In terms of elasticity, what does a perfectly elastic demand curve look like?

A horizontal line. Signup and view all the answers

Which of the following statements is true about the elasticity of gasoline compared to ice cream?

Gasoline has a more inelastic demand than ice cream. Signup and view all the answers

When using the midpoint method to calculate elasticity, what does Ed represent?

The ratio of percentage changes in quantity demanded and price. Signup and view all the answers

What is true about a steeper demand curve?

Indicates more inelastic demand. Signup and view all the answers

Using the midpoint method, how would you calculate Ed between points C and D given that P=50 and Qd=30, and P=25 and Qd=40?

Using the average prices and quantities to yield Ed=1.50. Signup and view all the answers

What is the significance of an Ed value equal to 1?

It indicates unit elastic demand. Signup and view all the answers

Which situation describes perfectly inelastic demand?

Qd remains constant regardless of price changes. Signup and view all the answers

What happens to the consumption of complementary goods when the price of one increases?

Consumption of the other good decreases. Signup and view all the answers

Which type of elasticity measures the responsiveness of producers to price changes?

Elasticity of Supply Signup and view all the answers

If the price of Coke increases, what is likely to happen to the quantity demanded of Pepsi?

It will increase. Signup and view all the answers

Under which condition is total revenue maximized concerning price elasticity of demand?

When price elasticity of demand is equal to 1. Signup and view all the answers

What is the nature of cross price elasticity for substitute goods?

Always positive. Signup and view all the answers

In general, when is the elasticity of supply larger?

In industries without specialized inputs. Signup and view all the answers

If a good has an inelastic price elasticity of demand, what effect does a price increase have on total revenue?

Total revenue will increase. Signup and view all the answers

Which of the following statements best describes the relationship between consumer expenditure and total revenue?

They are the same. Signup and view all the answers

Study Notes

Elasticity

Elasticity measures responsiveness of quantity demanded or quantity supplied to a change in one of their determinants (price, income etc.).
Price Elasticity of Demand (Ed) measures how much the quantity demanded of a good responds to a change in the price of that good.
- Formula: Ed = % change in Qd / % change in P
- Interpretation: A value of Ed = 2 indicates that for each 1% change in the price of the good, we expect a 2% change in the quantity demanded.
Classifying Ed:
- Ed < 1 is inelastic – consumers are NOT responsive to price changes.
- Ed > 1 is elastic – consumers are responsive to price changes.
- Ed = 1 is unit elastic – balances between inelastic and elastic.
- Ed = 0 is perfectly inelastic – quantity demanded does not change regardless of price changes.
- Ed = infinity is perfectly elastic – any price increase results in zero quantity demanded.
Calculating Ed using the Midpoint Method:
- Formula: Ed = [(Qd2–Qd1) / ((Qd2+Qd1)/2)] / [(P2–P1) / ((P2+P1)/2)]
- This method calculates the elasticity between two points on a demand curve, providing the same answer regardless of the starting point.
Determinants of Ed:
- Availability of Substitutes: More available substitutes lead to higher Ed.
- Time Horizon: Ed tends to be more elastic over longer time periods as consumers have more time to adjust.
- Definition or Scope of the Market: Narrower market definitions tend to have higher Ed, as more substitutes are available within the narrower scope.
- Necessity or Luxury: Necessities have low Ed, while luxuries have higher Ed.

Other Demand Elasticities

Income Elasticity of Demand measures how quantity demanded changes relative to a change in consumer income.
- Formula: Income Elasticity = % change in Qd / % change in income
- Normal Goods: Positive income elasticity – quantity demanded increases with increasing income.
- Inferior Goods: Negative income elasticity – quantity demanded decreases with increasing income.
Cross Price Elasticity measures the change in quantity demanded of one good (X) relative to the change in the price of another related good (Y).
- Formula: Cross Price Elasticity = % change Qd_X / % change P_Y
- Complements: Negative cross price elasticity – an increase in the price of one good leads to a decrease in the demand for the other.
- Substitutes: Positive cross price elasticity – an increase in the price of one good leads to an increase in the demand for the other.

Elasticity of Supply

Elasticity of Supply (Es) measures the responsiveness of producers to a change in the price of their product.
- Formula: Es = % change in Qs / % change in P
- Es tends to be larger in industries with less specialized inputs and longer time horizons.

Applications of Elasticity

Elasticity of Demand and Total Revenue:
- Ed > 1 (elastic) – Reducing price increases total revenue.
- Ed < 1 (inelastic) – Increasing price increases total revenue.
- Total revenue is maximized when Ed = 1.
Elasticity and Trade: Elasticity helps understand the impact of taxes or trade barriers on firms and consumers.
- Industries with inelastic demand are more likely to pass on the cost of taxes to consumers.
- Industries with elastic demand are less likely to pass on the cost of taxes, as consumers have more options to switch to substitutes.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz focuses on the concept of elasticity in economics, specifically price elasticity of demand. It explores how the quantity demanded responds to changes in price and includes various classifications of elasticity. Test your understanding of the calculations and interpretations of elasticity values.