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Questions and Answers
What does the parameter |Ed| represent in the context of price elasticity of demand?
What does the parameter |Ed| represent in the context of price elasticity of demand?
- The percentage change in price
- The absolute value of demand elasticity (correct)
- The total quantity demanded
- The total revenue generated from sales
In which situation would the price elasticity of demand (Ed) most likely be inelastic?
In which situation would the price elasticity of demand (Ed) most likely be inelastic?
- When the good is a luxury item
- When the good is a necessity for consumers (correct)
- When consumers spend a large share of their budget on the good
- When there are many close substitutes available
How does time horizon affect the price elasticity of demand?
How does time horizon affect the price elasticity of demand?
- It simplifies the calculation of price elasticity
- It increases elasticity as consumers adjust over longer periods (correct)
- It decreases elasticity because consumers cannot change behaviors quickly
- It has no effect on elasticity
What is the formula used to calculate the income elasticity of demand (EI)?
What is the formula used to calculate the income elasticity of demand (EI)?
Which determinant would likely make demand for a product more elastic?
Which determinant would likely make demand for a product more elastic?
What condition indicates perfectly elastic demand?
What condition indicates perfectly elastic demand?
What does the cross-price elasticity of demand (EXY) measure?
What does the cross-price elasticity of demand (EXY) measure?
In the context of price elasticity of supply, what does a greater production flexibility imply?
In the context of price elasticity of supply, what does a greater production flexibility imply?
Which statement is true regarding necessity goods in terms of elasticity?
Which statement is true regarding necessity goods in terms of elasticity?
What does the percentage change in quantity supplied divided by the percentage change in price represent?
What does the percentage change in quantity supplied divided by the percentage change in price represent?
Which condition describes perfectly elastic demand?
Which condition describes perfectly elastic demand?
In the context of the Total Revenue Rule, what happens when demand is unit elastic?
In the context of the Total Revenue Rule, what happens when demand is unit elastic?
A good is likely to have a low price elasticity of demand if it is considered a:
A good is likely to have a low price elasticity of demand if it is considered a:
What does it mean if the elasticity of demand is inelastic?
What does it mean if the elasticity of demand is inelastic?
In which scenario will an increase in a good's price lead to increased total revenue?
In which scenario will an increase in a good's price lead to increased total revenue?
If the elasticity of demand is elastic, what dominates the total revenue outcome when the price decreases?
If the elasticity of demand is elastic, what dominates the total revenue outcome when the price decreases?
Which statement about the elasticity of a linear demand curve is most accurate?
Which statement about the elasticity of a linear demand curve is most accurate?
How does the relative elasticity of supply and demand affect tax incidence?
How does the relative elasticity of supply and demand affect tax incidence?
The citizens of Rohan might spend a larger percentage of their income on food because:
The citizens of Rohan might spend a larger percentage of their income on food because:
According to the midpoint formula, how is elasticity calculated?
According to the midpoint formula, how is elasticity calculated?
Calculating the price elasticity of supply using the midpoint method from a price change from $16 to $24 and a supply change from 90 to 110 units yields what value?
Calculating the price elasticity of supply using the midpoint method from a price change from $16 to $24 and a supply change from 90 to 110 units yields what value?
When price decreases in a market with inelastic demand, what is the outcome on total revenue?
When price decreases in a market with inelastic demand, what is the outcome on total revenue?
If the price elasticity of supply is zero, the supply curve can be characterized as:
If the price elasticity of supply is zero, the supply curve can be characterized as:
Which statement accurately describes a situation of unit elasticity?
Which statement accurately describes a situation of unit elasticity?
When considering long-run elasticity, the ability of firms to enter and exit the market is likely to make the:
When considering long-run elasticity, the ability of firms to enter and exit the market is likely to make the:
In the context of elasticity, how is the relationship between price and quantity demanded affected when demand is perfectly inelastic?
In the context of elasticity, how is the relationship between price and quantity demanded affected when demand is perfectly inelastic?
An increase in the supply of grain will decrease total revenue for producers if the:
An increase in the supply of grain will decrease total revenue for producers if the:
Farmers adopting new technologies in competitive markets generally leads to a decrease in revenue because:
Farmers adopting new technologies in competitive markets generally leads to a decrease in revenue because:
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Study Notes
Elasticity
- Elasticity measures how much one variable changes in response to another.
- It's commonly used to assess the impact of price, income, or other factors on quantity demanded or supplied.
Price Elasticity of Demand
- Percentage change in quantity demanded divided by percentage change in price.
- Elastic demand: |Ed| > 1, meaning quantity demanded changes more than price.
- Inelastic demand: |Ed| < 1, meaning quantity demanded changes less than price.
- Unit elastic demand: |Ed| = 1, meaning quantity demanded changes proportionally to price.
Determinants of Price Elasticity of Demand
- Availability of substitutes: More substitutes, more elastic demand.
- Relative necessity: Necessities have inelastic demand, luxuries have elastic demand.
- Market definition: Narrowly defined markets have more elastic demand.
- Time horizon: Long-term demand is more elastic than short-term demand.
Other Elasticities
- Income Elasticity of Demand (EI): Measures the responsiveness of quantity demanded to changes in income.
- Cross-Price Elasticity of Demand (EXY): Measures the responsiveness of demand for one good to changes in the price of another good.
Price Elasticity of Supply
- Measures how much quantity supplied changes in response to changes in price.
- Formula: %∆Qs / %∆P
- Determinants include production flexibility and time horizon.
Calculating Elasticity: Midpoint Formula
- Used to avoid bias from direction of change.
- Formula: (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 P decreases, more units are sold.
- Price Effect: When P decreases, revenue per unit decreases.
- Elastic Demand: Quantity Effect dominates - price decrease increases TR.
- Unit Elastic Demand: Both effects cancel out - price decrease doesn't change TR.
- Inelastic Demand: Price Effect dominates - price decrease decreases TR.
Elasticity and Tax Incidence
- The less elastic side of the market (supply or demand) bears a greater share of the tax burden.
Elasticity and Surplus
- The more inelastic side of the market bears more of the tax burden and benefits more from a subsidy.
Comparing Price Elasticity of Two Intersecting Curves
- A larger change in quantity for a fixed price change indicates higher price elasticity.
Quick Quiz Answers
- Quiz 1: (a) The good is a necessity.
- Quiz 2: (c) Price; less
- Quiz 3: (d) Inelastic at some points and elastic at others.
- Quiz 4: (c) Rohan has lower income, and the income elasticity of demand is 0.5.
- Quiz 5: (c) 2
- Quiz 6: (c) Vertical
- Quiz 7: (c) The supply curve is more elastic.
- Quiz 8: (c) The demand curve is inelastic.
- Quiz 9: (a) Each farmer is a price taker.
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