Elasticity in Economics

Play an AI-generated podcast conversation about this lesson

What does elasticity measure in economics?

The cost of production for a specific good.
The absolute change in price of a product.
The total revenue generated by a company.
The responsiveness of one variable to a change in another. (correct)

Price elasticity of demand measures the percentage change in quantity demanded divided by the absolute change in price.

False (B)

Define price elasticity of supply in your own words.

Price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.

Netflix's packaging change and subsequent price increase in 2011 serves as an example of economic ________.

elasticity Signup and view all the answers

Imagine the price of gasoline increases by 10%, leading to a 2% decrease in the quantity of gasoline demanded. What is the price elasticity of demand for gasoline, and what type of elasticity does it represent?

-0.2, inelastic demand (A) Signup and view all the answers

What type of elasticity is indicated when the calculated value is greater than one?

Elastic (B) Signup and view all the answers

Unitary elasticity implies that the percentage change in quantity demanded or supplied is exactly equal to the percentage change in price.

True (A) Signup and view all the answers

According to the midpoint method, what is the formula for calculating the percentage change in quantity?

<code>((Q2 – Q1) / ((Q2 + Q1)/2)) * 100</code> Signup and view all the answers

An ________ demand or supply is one in which the elasticity is less than one.

inelastic Signup and view all the answers

If the percentage change in quantity demanded is 5% and the percentage change in price is 10%, what is the price elasticity of demand, and what type of elasticity does this represent?

0.5, Inelastic (C) Signup and view all the answers

What is the result of dividing the percentage change in quantity by the percentage change in price?

Price Elasticity (A) Signup and view all the answers

Suppose the price of a product increases from $4 to $6, and the quantity demanded decreases from 100 units to 80 units. Using the midpoint method, calculate the price elasticity of demand. Is the demand elastic, inelastic, or unitary elastic?

Price elasticity of demand = 0.67, demand is inelastic Signup and view all the answers

What characterizes infinite elasticity?

Quantity demanded or supplied changes by an infinite amount in response to any price change. (A) Signup and view all the answers

Zero elasticity implies that a large change in price will result in a proportional change in quantity demanded or supplied.

False (B) Signup and view all the answers

Describe the shape of a supply or demand curve that exhibits constant unitary elasticity.

curved line Signup and view all the answers

With zero elasticity, the supply and demand curves are ________.

vertical Signup and view all the answers

Match the type of elasticity with its corresponding characteristic:

Infinite Elasticity = Quantity changes infinitely with any price change. Zero Elasticity = Quantity does not change with any price change. Constant Unitary Elasticity = Percentage change in price equals percentage change in quantity. Signup and view all the answers

If the price of a product drastically increases but the quantity demanded remains the same, which type of elasticity does this scenario represent?

Zero elasticity (B) Signup and view all the answers

Which of the following scenarios best describes a good or service with nearly infinite elasticity?

A specific brand of luxury car (B) Signup and view all the answers

Imagine a situation where a 5% increase in the price of a good leads to exactly a 5% decrease in the quantity demanded. What type of elasticity is demonstrated?

Unitary elastic (A) Signup and view all the answers

Insanely difficult: Goods A and B have constant unitary elasticity. The price of good A increases by 10%, and the price of good B decreases by 10%. After the price change and holding all other factors constant, what is the combined percentage change in quantity demanded for goods A and B?

There is no change in the combined quantity demanded Signup and view all the answers

What is the primary challenge most businesses face daily?

Figuring out ways to produce. (B) Signup and view all the answers

Businesses can always pass cost savings onto consumers.

False (B) Signup and view all the answers

How does a cost-saving technological improvement typically affect the supply curve?

It shifts the supply curve to the right. Signup and view all the answers

When demand is __________, a cost-saving technological improvement will result in substantially lower prices.

inelastic Signup and view all the answers

If demand is elastic and supply shifts to the left due to rising costs, what is the primary result?

A lower equilibrium quantity. (A) Signup and view all the answers

When demand for a product is inelastic, increased costs are primarily absorbed by the producers.

False (B) Signup and view all the answers

Match the scenario with the likely outcome for consumers:

Inelastic Demand, Rising Costs = Suffer from paying a higher price for the same quantity Elastic Demand, Rising Costs = Suffer from buying a lower quantity (and needing to shift their consumption elsewhere) Inelastic Demand, Cost Savings = Benefit from a greater quantity at a lower price Elastic Demand, Cost Savings = Benefit from only slightly lower prices Signup and view all the answers

A new government regulation imposes a significant tax on the production of luxury yachts. The demand for luxury yachts is highly elastic. What is the most likely economic outcome of this tax?

The tax will lead to a substantial decrease in the quantity of yachts sold, as consumers are highly responsive to price increases. (C) Signup and view all the answers

A pharmaceutical company discovers a groundbreaking, patented process that drastically reduces the cost of producing a life-saving drug for a rare disease. Demand for this drug is perfectly inelastic, as patients require it to survive. If the company aims to maximize profit, what pricing strategy should they employ, and why?

The company should maintain the price near the pre-improvement level or slightly decrease it to capture a larger market share, as the demand is perfectly inelastic, consumers will purchase the quantity they need regardless of price. Drastically lowering the price would forgo potential profit, maintaining or only slightly reducing caters to the patient's needs while maximizing the firm's revenue. Signup and view all the answers

If the elasticity is greater than one, demand or supply is considered what?

Elastic (A) Signup and view all the answers

Inelastic demand or inelastic supply have elasticities greater than one.

False (B) Signup and view all the answers

What type of elasticities indicate proportional responsiveness of either demand or supply?

Unitary elasticities Signup and view all the answers

To calculate elasticity along a demand or supply curve economists use the ______ Method.

Midpoint Signup and view all the answers

Using the midpoint method, which formula is correct for calculating the percentage change in quantity?

$((Q2 - Q1) / ((Q2 + Q1)/2)) * 100$ (C) Signup and view all the answers

If the percentage change in quantity demanded is 10% and the percentage change in price is 20%, what type of demand is it?

Inelastic (D) Signup and view all the answers

Explain in what situation the price elasticity of demand will be smaller than one.

If the percentage change in quantity is smaller than the percentage change in price: it's inelastic. Signup and view all the answers

Price elasticity of demand measures the percentage change in quantity demanded divided by the percentage change in quantity supplied.

False (B) Signup and view all the answers

Netflix's packaging change in 2011, including a price increase, is an example of an economic concept called ________.

elasticity Signup and view all the answers

Suppose the price of a certain luxury car increases by 10%, and as a result, the quantity demanded decreases by 25%. What is the price elasticity of demand for the car, using the simple percentage change method, and how is this demand described?

2.5, elastic (B) Signup and view all the answers

What does 'tax incidence' refer to?

The manner in which the tax burden is divided between buyers and sellers. (D) Signup and view all the answers

If the demand for a product is more elastic than the supply, consumers will bear most of the tax burden.

False (B) Signup and view all the answers

What implication does an excise tax have on the prices perceived by consumers and producers?

An excise tax introduces a wedge between the price paid by consumers and the price received by producers. Signup and view all the answers

The more elastic the demand and supply curves are, the ______ the tax revenue.

lower Signup and view all the answers

Match the following scenarios with the correct incidence of tax burden:

Demand is more inelastic than supply = Consumers bear most of the tax burden Supply is more inelastic than demand = Sellers bear most of the tax burden Signup and view all the answers

In the context of tax incidence, what does Pc – Pe represent?

The tax incidence on consumers. (D) Signup and view all the answers

Elasticities are generally higher in the short run compared to the long run.

False (B) Signup and view all the answers

In the short run, do prices or quantities typically move more in most markets for goods and services?

Prices Signup and view all the answers

Consider a market where both supply and demand are perfectly inelastic. If a tax is imposed, who bears the entire tax burden?

The burden is split evenly between consumers and producers. (C) Signup and view all the answers

What type of elasticity is demonstrated when the quantity demanded or supplied changes by an infinite amount in response to any change in price?

Perfect elasticity (C) Signup and view all the answers

With zero elasticity, a large percentage change in price will result in a significant change in quantity.

False (B) Signup and view all the answers

What shape is the demand curve when elasticity is perfectly inelastic?

Vertical Signup and view all the answers

If the price of a product increases by 1%, and the quantity demanded decreases by 1%, which type of elasticity is demonstrated?

Constant Unitary elasticity (C) Signup and view all the answers

A supply or demand curve with zero elasticity is represented graphically as a ______ line.

vertical Signup and view all the answers

Which of the following scenarios best describes perfect inelasticity?

A significant increase in price leads to no change in quantity demanded. (D) Signup and view all the answers

Match each elasticity type with its graphical representation:

Perfect Elasticity = Horizontal line Zero Elasticity = Vertical line Constant Unitary Elasticity = Curved line Signup and view all the answers

Imagine that a life-saving medication has a perfectly inelastic demand curve. If the price of this medication were to increase dramatically, what would most likely happen to the quantity demanded?

The quantity demanded would remain the same. (B) Signup and view all the answers

For a constant unitary elasticity supply curve, what point does the straight line originate from on a graph?

the origin Signup and view all the answers

What is Elasticity?

Measures how much one economic variable responds to changes in another variable.

Price Elasticity of Demand

The ratio of the percentage change in quantity demanded to the percentage change in price.