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Questions and Answers
What characterizes demand when the elasticity is greater than 1?
What characterizes demand when the elasticity is greater than 1?
What does a perfectly inelastic demand curve look like?
What does a perfectly inelastic demand curve look like?
If a demand curve has unit elasticity, how do the percentage changes in quantity and price compare?
If a demand curve has unit elasticity, how do the percentage changes in quantity and price compare?
Which of the following indicates a highly elastic demand?
Which of the following indicates a highly elastic demand?
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In what case is demand referred to as perfectly elastic?
In what case is demand referred to as perfectly elastic?
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What is the relationship between the slope of a demand curve and its price elasticity of demand?
What is the relationship between the slope of a demand curve and its price elasticity of demand?
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How can one remember the characteristics of inelastic demand curves?
How can one remember the characteristics of inelastic demand curves?
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What happens to demand when there is a small change in price for perfectly elastic demand?
What happens to demand when there is a small change in price for perfectly elastic demand?
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What characterizes elastic demand?
What characterizes elastic demand?
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What occurs at a price above $4 in a perfectly elastic demand scenario?
What occurs at a price above $4 in a perfectly elastic demand scenario?
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If the price of a good increases by 22%, what is the expected percentage change in quantity demanded if the elasticity is 3?
If the price of a good increases by 22%, what is the expected percentage change in quantity demanded if the elasticity is 3?
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How is total revenue calculated?
How is total revenue calculated?
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At exactly $4, what is the quantity demanded in a perfectly elastic demand scenario?
At exactly $4, what is the quantity demanded in a perfectly elastic demand scenario?
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What does it mean when the price elasticity of demand equals infinity?
What does it mean when the price elasticity of demand equals infinity?
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Which of the following statements about total revenue is NOT true?
Which of the following statements about total revenue is NOT true?
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What is the relationship between price elasticity of demand and total revenue when demand is elastic?
What is the relationship between price elasticity of demand and total revenue when demand is elastic?
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What characterizes normal goods in terms of income elasticity of demand?
What characterizes normal goods in terms of income elasticity of demand?
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What type of goods generally have small income elasticities?
What type of goods generally have small income elasticities?
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How is the income elasticity of demand calculated?
How is the income elasticity of demand calculated?
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What do inferior goods indicate about the relationship between quantity demanded and income?
What do inferior goods indicate about the relationship between quantity demanded and income?
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What does the cross-price elasticity of demand measure?
What does the cross-price elasticity of demand measure?
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What type of goods typically have large income elasticities?
What type of goods typically have large income elasticities?
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Which scenario might indicate a positive income elasticity?
Which scenario might indicate a positive income elasticity?
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What would be the effect on the demand for an inferior good when consumer income rises?
What would be the effect on the demand for an inferior good when consumer income rises?
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What is the price elasticity of supply?
What is the price elasticity of supply?
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Why might the price elasticity of supply differ between the long run and the short run?
Why might the price elasticity of supply differ between the long run and the short run?
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What happens to the elasticity of supply at low levels of quantity supplied?
What happens to the elasticity of supply at low levels of quantity supplied?
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How is the price elasticity of supply calculated?
How is the price elasticity of supply calculated?
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What indicates an inelastic supply curve when analyzing price changes?
What indicates an inelastic supply curve when analyzing price changes?
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When a price increases from $12 to $15 and quantity supplied rises from 500 to 525, what can be inferred about the elasticity of supply?
When a price increases from $12 to $15 and quantity supplied rises from 500 to 525, what can be inferred about the elasticity of supply?
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What effect does maximum production capacity have on the elasticity of supply?
What effect does maximum production capacity have on the elasticity of supply?
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What can be concluded about the general shape of the supply curve based on price elasticity?
What can be concluded about the general shape of the supply curve based on price elasticity?
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What happened to the price of oil from 1979 to 1981?
What happened to the price of oil from 1979 to 1981?
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What occurred among OPEC members in 1986 that impacted oil prices?
What occurred among OPEC members in 1986 that impacted oil prices?
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What was a primary consequence of OPEC's actions from 1982 to 1985?
What was a primary consequence of OPEC's actions from 1982 to 1985?
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By 1990, how did the price of oil compare to where it was in 1970?
By 1990, how did the price of oil compare to where it was in 1970?
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What was the main driving force affecting oil prices in the early 21st century?
What was the main driving force affecting oil prices in the early 21st century?
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Why is the supply of oil considered inelastic in the short run?
Why is the supply of oil considered inelastic in the short run?
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How does the oil price trend of the 1990s compare to previous decades?
How does the oil price trend of the 1990s compare to previous decades?
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What was a significant factor that influenced oil prices in the 21st century aside from OPEC?
What was a significant factor that influenced oil prices in the 21st century aside from OPEC?
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What happens when the supply of oil shifts from S1 to S2 in the short run?
What happens when the supply of oil shifts from S1 to S2 in the short run?
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How do consumers typically respond to high oil prices in the long run?
How do consumers typically respond to high oil prices in the long run?
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Why is OPEC's ability to maintain high oil prices limited in the long run?
Why is OPEC's ability to maintain high oil prices limited in the long run?
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What is one effect of drug dependence mentioned in the content?
What is one effect of drug dependence mentioned in the content?
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In the context of OPEC's supply reduction, what is a potential short-term benefit to the cartel?
In the context of OPEC's supply reduction, what is a potential short-term benefit to the cartel?
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What characterizes the long-run supply and demand curves compared to the short-run curves?
What characterizes the long-run supply and demand curves compared to the short-run curves?
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What strategy does OPEC use to influence oil prices in the short run?
What strategy does OPEC use to influence oil prices in the short run?
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What is a persistent societal problem related to illegal drugs?
What is a persistent societal problem related to illegal drugs?
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Study Notes
Elasticity and its Application
- Imagine an event that changes the price of gasoline. This could be a war in the Middle East, a booming Chinese economy, or a new tax on gasoline.
- Consumers would buy less gasoline, following the law of demand.
- Elasticity measures the responsiveness of quantity demanded or supplied to a change in one of its determinants.
- Elasticity is useful to understand the effect of an event or policy on a market.
- Elasticity of demand is affected by the availability of substitutes. Goods with close substitutes have more elastic demand.
- Necessities have inelastic demand, luxuries have elastic demand.
- The time horizon also affects elasticity, with demand becoming more elastic in the longer run.
The Elasticity of Demand
- Elasticity measures the responsiveness of quantity demanded to a change in one of its determinants.
- Price elasticity of demand measures how much quantity demanded responds to a change in price.
- Elastic demand: Quantity demanded responds substantially to changes in price.
- Inelastic demand: Quantity demanded responds only slightly to changes in price.
- Availability of substitutes affects elasticity.
- Goods with many close substitutes have more elastic demand.
- Necessities tend to have inelastic demand, while luxuries have elastic demand.
- Time horizon matters, with demand becoming more elastic in longer periods.
Computing the Price Elasticity of Demand
- The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.
- In example: a 10% price increase causes a 20% fall in demand, the elasticity is 2.
The Midpoint Method
- The midpoint method for calculating elasticities avoids the problem that percentage changes are different when viewed from different points.
- The formula: (Q2 − Q1)/[(Q2 + Q1)/2] / (P2 − P1)/[(P2 + P1)/2]
- The formula computes the percentage change in quantity demanded divided by the percentage change in price.
The Variety of Demand Curves
- Economists classify demand curves according to their elasticity.
- Elastic when elasticity is > 1 (quantity proportionately more responsive than price).
- Inelastic when elasticity is < 1 (quantity proportionately less responsive than price).
- Unit elasticity when elasticity = 1 (percentage change in quantity equals the percentage change in price).
- The flatter the demand curve at a given point, the greater the price elasticity of demand.
- The steeper the demand curve, the smaller the elasticity.
Total Revenue and the Price Elasticity of Demand
- When demand is inelastic, price and total revenue move in the same direction. If price increases, total revenue increases.
- When demand is elastic, price and total revenue move in opposite directions. If price increases, total revenue decreases.
- When demand is unit elastic, total revenue remains constant when the price changes.
Controls on Prices
- Price ceilings are legal maximum prices, price floors are legal minimum prices.
- If a price ceiling is below the equilibrium price, it binds. There will be a shortage in the relevant market.
- If a price ceiling is above the equilibrium price, it does not bind; the market price will still be at equilibrium level.
- If a price floor is above the equilibrium price, the price floor is binding. This will create a surplus in the market.
- If a price floor is below the equilibrium price, the price floor is not binding; the market price will still be at the equilibrium level.
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Description
Test your knowledge on the characteristics of demand elasticity with this interactive quiz. Explore concepts like perfect elasticity, inelastic demand curves, and the relationship between price changes and quantity demanded. Ideal for students studying economics and demand theory.
