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Elasticity in Supply and Demand

Test your knowledge on the concept of elasticity, which allows for a more precise analysis of supply and demand in the market. Explore the responsiveness of buyers and sellers to changes in market conditions, and understand the implications of elastic and inelastic demand curves.

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Questions and Answers

What is the price elasticity of demand when it is perfectly inelastic?

Equal to zero

When is a demand curve considered elastic?

When an increase in price reduces the quantity demanded a lot

What does the midpoint formula for price elasticity of demand help solve?

Dependence on the choice of starting point for percentage change calculation

What does it mean if the price elasticity of demand is less than one?

<p>Quantity demanded does not respond strongly to price changes</p> Signup and view all the answers

According to the elasticity rule, which curve is considered more elastic when two linear demand curves run through a common point?

<p>The flatter curve</p> Signup and view all the answers

What does the midpoint method calculate changes in a variable compared with?

<p>The average, or midpoint, of the starting and final values</p> Signup and view all the answers

What does it mean when a demand curve is inelastic?

<p>An increase in price reduces the quantity demanded just a little</p> Signup and view all the answers

When is demand considered perfectly elastic?

<p>When there is an infinite change in quantity demanded for any change in price</p> Signup and view all the answers

What does it mean if the price elasticity of demand is greater than one?

<p>Quantity demanded responds strongly to changes in price</p> Signup and view all the answers

What does elasticity allow us to analyze with greater precision?

<p>Supply and demand</p> Signup and view all the answers

What happens to total revenue when the demand for a good is elastic?

<p>Total revenue decreases</p> Signup and view all the answers

What does a perfectly inelastic demand curve look like?

<p>A vertical line</p> Signup and view all the answers

When is demand considered unit-elastic?

<p>When the price elasticity of demand is exactly 1</p> Signup and view all the answers

What does a perfectly elastic demand curve look like?

<p>A horizontal line</p> Signup and view all the answers

When is demand considered inelastic?

<p>When the price elasticity of demand is less than 1</p> Signup and view all the answers

What does it mean when demand for a good is perfectly elastic?

<p>It means any price increase will cause the quantity demanded to drop to zero.</p> Signup and view all the answers

Why does it matter whether demand is unit-elastic, inelastic, or elastic?

<p>This classification predicts how changes in the price of a good will affect total revenue earned by producers.</p> Signup and view all the answers

What happens to total revenue when a seller raises the price of a good with elastic demand?

<p>Total revenue decreases</p> Signup and view all the answers

What is the formula for price elasticity of demand using the midpoint method?

<p>($rac{ ext{Average quantity} imes ext{Average price}}{ ext{Change in quantity demanded} imes ext{Change in price}}$)</p> Signup and view all the answers

What does it mean if the price elasticity of demand is equal to 1?

<p>Demand is unit-elastic</p> Signup and view all the answers

In which case is demand considered perfectly inelastic?

<p>When the percentage change in quantity demanded is zero for any percentage change in price</p> Signup and view all the answers

What happens to total revenue when the demand for a good is elastic?

<p>Total revenue decreases as price increases</p> Signup and view all the answers

According to the elasticity rule, which curve is considered more elastic when two linear demand curves run through a common point?

<p>$D_1: Q = 10 - 2P$, $D_2: Q = 6 - P$</p> Signup and view all the answers

What does a demand curve look like when demand is perfectly elastic?

<p>Horizontal line</p> Signup and view all the answers

What does it mean when a demand curve is inelastic?

<p>The percentage change in quantity demanded is less than the percentage change in price</p> Signup and view all the answers

What does a perfectly inelastic demand curve look like?

<p>Vertical line</p> Signup and view all the answers

When is a demand curve considered elastic?

<p>When there are large changes in quantity demanded for small changes in price</p> Signup and view all the answers

What does the midpoint method calculate changes compared with?

<p>The average or midpoint of starting and final values</p> Signup and view all the answers

When is demand considered unit-elastic?

<p>When the price elasticity of demand is exactly 1</p> Signup and view all the answers

What does it mean if the price elasticity of demand is less than one?

<p>Demand is inelastic</p> Signup and view all the answers

What happens to total revenue when a seller raises the price of a good with elastic demand?

<p>Total revenue decreases</p> Signup and view all the answers

What does a perfectly elastic demand curve look like?

<p>A horizontal line</p> Signup and view all the answers

What does a perfectly inelastic demand curve look like?

<p>A vertical line</p> Signup and view all the answers

Why does it matter whether demand is unit-elastic, inelastic, or elastic?

<p>Because this classification predicts how changes in the price of a good will affect the total revenue earned by producers from the sale of that good</p> Signup and view all the answers

What is the formula for price elasticity of demand using the midpoint method?

<p>$rac{Q_2 - Q_1}{Q_2 + Q_1} imes rac{P_2 + P_1}{P_2 - P_1}$</p> Signup and view all the answers

When is demand considered perfectly inelastic?

<p>When the quantity demanded does not respond at all to changes in the price</p> Signup and view all the answers

What does the midpoint method calculate changes compared with?

<p>Average of initial and final values</p> Signup and view all the answers

What happens to total revenue when a seller raises the price of a good with elastic demand?

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

According to the elasticity rule, which curve is considered more elastic when two linear demand curves run through a common point?

<p>The flatter curve</p> Signup and view all the answers

What does it mean if the price elasticity of demand is less than one?

<p>Quantity demanded does not respond strongly to price changes</p> Signup and view all the answers

What does a perfectly elastic demand curve look like?

<p>Horizontal line</p> Signup and view all the answers

What does it mean when a demand curve is inelastic?

<p>Quantity demanded does not respond strongly to price changes</p> Signup and view all the answers

What happens to total revenue when the demand for a good is elastic?

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

When is demand considered unit-elastic?

<p>When the percentage change in quantity demanded equals the percentage change in price</p> Signup and view all the answers

What happens to total revenue when demand for a good is elastic?

<p>Total revenue decreases</p> Signup and view all the answers

What does a perfectly inelastic demand curve look like?

<p>A vertical line</p> Signup and view all the answers

When is demand considered unit-elastic?

<p>When the price elasticity of demand is exactly 1</p> Signup and view all the answers

What does it mean if the price elasticity of demand is less than 1?

<p>Demand is inelastic</p> Signup and view all the answers

What does it mean when a seller raises the price of a good with elastic demand?

<p>Total revenue decreases</p> Signup and view all the answers

What does it mean when demand for a good is perfectly elastic?

<p>A horizontal line</p> Signup and view all the answers

What does it mean if the price elasticity of demand is greater than 1?

<p>Demand is elastic</p> Signup and view all the answers

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Study Notes

Price Elasticity of Demand

  • When the price elasticity of demand is perfectly inelastic, it means that the quantity demanded does not change in response to a change in price.

Elasticity of Demand Curve

  • A demand curve is considered elastic if a small price change leads to a large quantity change.
  • A demand curve is considered inelastic if a large price change leads to a small quantity change.

Midpoint Formula

  • The midpoint formula for price elasticity of demand helps solve the problem of averaging the two prices and quantities when calculating elasticity.

Price Elasticity Interpretation

  • If the price elasticity of demand is less than one, demand is inelastic, meaning small price changes lead to small quantity changes.
  • If the price elasticity of demand is greater than one, demand is elastic, meaning small price changes lead to large quantity changes.
  • If the price elasticity of demand is equal to one, demand is unit-elastic, meaning small price changes lead to proportional quantity changes.

Elasticity Rule

  • According to the elasticity rule, when two linear demand curves run through a common point, the steeper curve is more inelastic, and the flatter curve is more elastic.

Midpoint Method

  • The midpoint method calculates changes in a variable compared to the average of the initial and final values.

Demand Curve Shapes

  • A perfectly inelastic demand curve is a vertical line, indicating that quantity demanded does not change in response to price changes.
  • A perfectly elastic demand curve is a horizontal line, indicating that a small price change leads to an infinite quantity change.

Total Revenue

  • When demand is elastic, a price increase leads to a decrease in total revenue.
  • When demand is inelastic, a price increase leads to an increase in total revenue.

Importance of Elasticity

  • Elasticity allows us to analyze the responsiveness of demand and supply to changes in price and other factors with greater precision.
  • It matters whether demand is unit-elastic, inelastic, or elastic because it affects how businesses and policymakers make decisions about pricing and production.

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