Elasticity in Economics

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Questions and Answers

What happens to quantity demanded when price increases, according to the concept of price elasticity of demand?

Quantity demanded remains constant.

Quantity demanded increases.

Quantity demanded may increase or decrease.

Quantity demanded decreases. (correct)

If a product's price rises by 10% and quantity demanded falls by 15%, what is the price elasticity of demand?

0.67

2.0

1.33

1.5 (correct)

How is the percentage change in quantity demanded calculated?

End value minus start value divided by the start value. (correct)

Start value minus end value divided by end value.

Start value minus end value divided by start value.

End value minus start value divided by end value.

What does a price elasticity of demand value of 1.5 indicate?

Demand is elastic. Signup and view all the answers

In calculating price elasticity of demand, why do we drop the minus sign?

All price elasticities are reported as positive values. Signup and view all the answers

What does elasticity specifically measure in economics?

The response of buyers and sellers to changes in market conditions Signup and view all the answers

How is the price elasticity of demand calculated?

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

What is one of the main types of elasticity discussed in microeconomics?

Price elasticity of demand Signup and view all the answers

What is the significance of understanding elasticity in economics?

It provides insights for producers and governments about market behavior Signup and view all the answers

Which of the following is NOT a type of elasticity mentioned?

Utility elasticity Signup and view all the answers

What can determine the relationship between price and quantity demanded?

The interaction of supply and demand Signup and view all the answers

A high price elasticity of demand indicates that consumers are:

Sensitive to price changes Signup and view all the answers

Which factor does price elasticity of supply measure?

Changes in quantity supplied in response to price changes Signup and view all the answers

What is the formula for calculating the % change in P using the midpoint method?

(end value – start value) / midpoint x 100% Signup and view all the answers

If the price increases from $200 to $250, what is the % change in price using the midpoint method?

22.2% Signup and view all the answers

What factor tends to increase the price elasticity of demand for a product?

Availability of close substitutes Signup and view all the answers

Given the price elasticity of demand formula, how is elasticity defined?

% change in Qd / % change in P Signup and view all the answers

Using the given data, what is the % change in quantity demanded when price changes from $400 to $600?

40% Signup and view all the answers

How is the midpoint calculated for the given price change from $400 to $600?

$500 Signup and view all the answers

If the price elasticity between two products is calculated to be 1.8, what does this value indicate?

Demand is elastic Signup and view all the answers

Which of the following is NOT a determinant of price elasticity of demand?

Total consumption quantity Signup and view all the answers

What happens to the quantity of butter sold when there is a small increase in its price, assuming margarine price is constant?

It falls by a large amount. Signup and view all the answers

Which of the following statements about the demand for necessities and luxuries is true?

Demand for necessities is generally inelastic while demand for luxuries is elastic. Signup and view all the answers

In terms of price elasticity, how does the definition of a market affect elasticity?

Price elasticity is higher for narrowly defined markets than broadly defined ones. Signup and view all the answers

Which good is an example of perfectly inelastic demand?

Insulin for diabetics. Signup and view all the answers

How does the time horizon affect the price elasticity of demand?

Demand tends to be more elastic over longer time horizons. Signup and view all the answers

What best describes unit elastic demand?

Quantity demanded changes by the same percentage as the price. Signup and view all the answers

If all perfectly competitive markets exhibit perfect elasticity, what does that imply?

A minor price increase causes buyers to switch to another seller. Signup and view all the answers

Which of the following is true regarding the demand for eggs compared to butter?

Demand for eggs is less elastic than demand for butter. Signup and view all the answers

What characterizes inelastic demand?

Quantity demanded does not change significantly with price changes. Signup and view all the answers

Which type of demand is represented by a vertical demand curve?

Perfectly inelastic demand Signup and view all the answers

What is the elasticity of demand when the percentage change in quantity demanded is equal to the percentage change in price?

Exactly 1 Signup and view all the answers

When the demand is perfectly elastic, how does the quantity demanded respond to price changes?

It changes by any percentage in response to price changes. Signup and view all the answers

Which of the following best describes elastic demand?

Quantity demanded decreases significantly in response to price increases. Signup and view all the answers

If the price of a luxury good like a sports car rises, how is the quantity demanded likely to change?

It may significantly decrease due to luxury status. Signup and view all the answers

What is the price elasticity of demand if a 10% increase in price leads to a 0% change in quantity demanded?

0 Signup and view all the answers

How do luxury goods generally behave in terms of price elasticity?

They typically have elastic demand. Signup and view all the answers

If a product has a price elasticity of demand greater than 1, what does this indicate?

It is elastic. Signup and view all the answers

What does a horizontal demand curve represent?

Perfectly elastic demand Signup and view all the answers

Study Notes

Elasticity

Elasticity - A practical measure for economists to understand the interaction of supply and demand forces.
Elasticity calculates the response of buyers and sellers to changes in market conditions.
Producers and governments use the measure to gain insight into market activities and behavior.

Types of Elasticity

Price elasticity of demand: Measures the percentage change in quantity demanded for a one percent change in price.
Income elasticity of demand: Measures the percentage change in quantity demanded for a one percent change in income.
Price elasticity of supply: Measures the percentage change in quantity supplied for a one percent change in price.

Price Elasticity of Demand

It's the percentage change in quantity demanded divided by the percentage change in price.
The standard method for computing percent change: (End Value - Start Value)/Start Value x 100%
To calculate the price elasticity of demand, we use the absolute value of the percentage change.
The midpoint method is used for computing percentage changes as well.
The formula for the midpoint method is: (End Value - Start Value)/Midpoint Value x 100%

Determinants of Price Elasticity of Demand

Availability of close substitutes: Goods with close substitutes have more elastic demand because consumers can easily switch to alternatives. For example, butter and margarine.
Necessities versus luxuries: Necessities tend to have inelastic demand, while luxuries have elastic demand. For example, insulin is a necessity for diabetic patients, while a yacht is a luxury.
Definition of the market: Price elasticity is higher for narrowly defined markets than for broadly defined ones.
Time horizon: Goods tend to have more elastic demand over longer time horizons. For example, gasoline.

Ranges of Elasticity of Demand

Perfectly Inelastic: Quantity demanded doesn't change regardless of price changes. For example, insulin for diabetic patients
Perfectly Elastic: Quantity demanded changes significantly with small price changes. For example, a perfectly competitive market for identical products like wheat.
Unit Elastic: Quantity demanded changes by the same percentage as the price.
Inelastic: Quantity demanded doesn't respond strongly to price changes. For example, gasoline.
Elastic: Quantity demanded responds strongly to price changes. For example, luxury goods like designer handbags.

Perfectly Inelastic Demand

The price elasticity of demand is 0.
The demand curve is vertical.
The quantity demanded doesn't change even when the price changes.

Perfectly Elastic Demand

The price elasticity of demand is infinity.
The demand curve is horizontal.
Quantity demanded changes by any percentage with minimal price change.

Unit Elastic Demand

The price elasticity of demand is 1.
The demand curve has an intermediate slope.
Quantity demanded changes by the same percentage as the price.

Elastic Demand

The price elasticity of demand is greater than 1.
The demand curve has a relatively flat slope.
Quantity demanded changes by more than the percentage change in price.

Inelastic Demand

The price elasticity of demand is less than 1.
The demand curve has a relatively steep slope.
Quantity demanded changes by less than the percentage change in price.

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Description

This quiz covers the concept of elasticity, a crucial measure for understanding supply and demand dynamics. It includes various types of elasticity such as price elasticity of demand and supply, along with their calculations. Test your knowledge on how these concepts are applied in economic analysis.