34 Questions
What is the quantity demanded at a price above $4 in a perfectly elastic demand curve?
Zero
What is the formula to compute total revenue?
TR = P x Q
What happens to total revenue when there is an increase in price in an inelastic demand curve?
Total revenue increases
What is the characteristic of a perfectly elastic demand curve?
Even a small increase in price leads to an infinite decrease in quantity demanded
What happens to quantity demanded when there is a 67% decrease in quantity demanded?
The quantity demanded decreases by 33%
What happens to total revenue when price increases in an inelastic demand market?
Total revenue increases
At exactly $4, what is the behavior of consumers in a perfectly elastic demand curve?
They will buy any quantity
What is the initial total revenue in the given figure?
$100
What happens to quantity demanded when price increases in an elastic demand market?
It decreases more than proportionately
What is the relationship between price and total revenue in an elastic demand market?
An increase in price leads to a decrease in total revenue
What can be inferred about the demand curve in the given figure?
It is inelastic
What happens to the quantity demanded when the price increases from $1 to $3 in the given figure?
It decreases from 100 to 80
What is the result of an increase in price from $4 to $5 on total revenue in a market with elastic demand?
A decrease in total revenue from $200 to $100
What is the formula for computing income elasticity of demand?
Percentage change in quantity demanded divided by percentage change in income
What is the characteristic of a market with elastic demand?
A small change in price leads to a large change in quantity demanded
What does the income elasticity of demand measure?
The percentage change in quantity demanded resulting from a percentage change in income
What is true about the quantity demanded of inferior goods?
It decreases when income increases
What happens to the quantity demanded when the price increases in a market with elastic demand?
It decreases
What is an example of a normal good?
Food
What is the author's main purpose in discussing the concept of elasticity of demand?
To show how changes in price affect the quantity demanded
What is the effect of an increase in consumers' income on the quantity demanded of a good?
The quantity demanded increases
What is the price elasticity of supply?
A measure of how much the quantity supplied responds to a change in price
Which of the following goods is likely to be income elastic?
Furs
What is the main difference between normal goods and inferior goods?
Normal goods are income inelastic, while inferior goods are income elastic
What is true about the quantity demanded of normal goods?
It increases when income increases
What is an example of an income inelastic good?
Food
If the price of a good increases by 22%, what will be the percentage change in quantity supplied in an elastic supply curve?
67%
What is the characteristic of a unit elastic supply curve?
The percentage change in quantity supplied is equal to the percentage change in price
If the elasticity of supply is less than 1, what can be said about the responsiveness of quantity supplied to a change in price?
Quantity supplied is not very responsive to changes in price
What is the characteristic of a perfectly elastic supply curve?
Quantity supplied is infinite at any price above a certain level
If the price of a good increases by 10%, what will be the percentage change in quantity supplied in an inelastic supply curve?
5%
What is the elasticity of supply in the graph where a 22% increase in price leads to a 22% increase in quantity supplied?
Equal to 1
If the elasticity of supply is greater than 1, what can be said about the responsiveness of quantity supplied to a change in price?
Quantity supplied is very responsive to changes in price
What is the characteristic of an inelastic supply curve?
Quantity supplied is not very responsive to changes in price
Study Notes
Price Elasticity of Demand
- A 67% decrease in quantity demanded leads to a perfectly elastic demand curve.
- Three characteristics of a perfectly elastic demand curve:
- At any price above $4, quantity demanded is zero.
- At exactly $4, consumers will buy any quantity.
- At a price below $4, quantity demanded is infinite.
Total Revenue and Price Elasticity of Demand
- Total revenue (TR) is the amount paid by buyers and received by sellers of a good, computed as TR = P x Q.
- With an inelastic demand curve, an increase in price leads to a decrease in quantity that is proportionately smaller, thus total revenue increases.
- With an elastic demand curve, an increase in price leads to a decrease in quantity demanded that is proportionately larger, thus total revenue decreases.
Income Elasticity of Demand
- Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
- Income elasticity of demand is computed as the percentage change in quantity demanded divided by the percentage change in income.
- Types of goods:
- Normal goods: higher income raises the quantity demanded.
- Inferior goods: higher income lowers the quantity demanded.
- Income inelastic goods: necessities such as food, fuel, clothing, utilities, and medical services.
- Income elastic goods: luxuries such as sports cars, furs, and expensive foods.
The Elasticity of Supply
- Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
- Price elasticity of supply is the percentage change in quantity supplied resulting from a percent change in price.
- Five types of supply curves:
- Perfectly inelastic supply: elasticity equals 0.
- Inelastic supply: elasticity is less than 1.
- Unit elastic supply: elasticity equals 1.
- Elastic supply: elasticity is greater than 1.
- Perfectly elastic supply: elasticity equals infinity.
This quiz explores the concept of price elasticity of demand, including perfectly elastic demand and its graphical representation.
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