Elasticity of Demand

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is elasticity a measure of?

How much buyers respond to changes in market conditions

How much sellers respond to changes in market conditions

Both buyers and sellers' responses to changes in market conditions (correct)

None of the above

Define price elasticity of demand.

Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.

Elastic demand occurs when the price elasticity of demand is _________ one.

greater than

Inelastic demand means that the quantity demanded does not respond strongly to price changes.

True Signup and view all the answers

Match the following demand curve types with their characteristics:

Perfectly Inelastic Demand = Quantity demanded does not respond to price changes Perfectly Elastic Demand = Quantity demanded changes infinitely with any change in price Unit Elastic Demand = Quantity demanded changes by the same percentage as the price Inelastic Demand = Quantity demanded does not respond strongly to price changes Elastic Demand = Quantity demanded responds strongly to changes in price Signup and view all the answers

Define income elasticity of demand (YED).

Income elasticity of demand is a measure of how the quantity demanded of a good responds to a change in consumers' income. Signup and view all the answers

Which of the following is an example of a normal good?

Food Signup and view all the answers

Goods consumers regard as luxuries tend to be income elastic.

True Signup and view all the answers

Calculate the Income Elasticity of Demand using the Midpoint formula: Income increases from RM1,500 to RM2,000. Demand of fast food burger decreases from 5 to __.

1 Signup and view all the answers

Explain price elasticity of supply.

Price elasticity of supply measures how the quantity supplied of a good responds to a change in the price of that good. Signup and view all the answers

Match the Price Elasticity of Supply types with their descriptions:

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 Signup and view all the answers

Why is supply more elastic in the long run?

Supply is more elastic in the long run because sellers have more time to adjust the amount of the good they produce. Signup and view all the answers

How is price elasticity of supply calculated?

Price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. Signup and view all the answers

Study Notes

Elasticity and Its Applications

The Elasticity of Demand

Measures how much the quantity demanded responds to changes in the price of a good
Calculated as the percentage change in quantity demanded divided by the percentage change in price
Types:
- Inelastic Demand: quantity demanded does not respond strongly to price changes (elasticity < 1)
- Elastic Demand: quantity demanded responds strongly to price changes (elasticity > 1)
- Unit Elastic Demand: quantity demanded changes by the same percentage as the price (elasticity = 1)
- Perfectly Inelastic Demand: quantity demanded does not respond to price changes (elasticity = 0)
- Perfectly Elastic Demand: quantity demanded changes infinitely with any change in price (elasticity = ∞)

Determinants of Elasticity of Demand

Availability of close substitutes
Necessities vs luxuries
Definition of the market
Time horizon

Computing the Price Elasticity of Demand

Formula: (percentage change in quantity demanded) / (percentage change in price)
Midpoint formula: (Q2 - Q1) / [(Q2 + Q1) / 2] x 100%

The Variety of Demand Curves

Inelastic Demand: quantity demanded does not respond strongly to price changes
Elastic Demand: quantity demanded responds strongly to price changes
Unit Elastic Demand: quantity demanded changes by the same percentage as the price
Perfectly Inelastic Demand: quantity demanded does not respond to price changes
Perfectly Elastic Demand: quantity demanded changes infinitely with any change in price

Total Revenue and the Price Elasticity of Demand

Total revenue is the amount paid by buyers and received by sellers of a good
Computed as the price of the good times the quantity sold
Relationship between total revenue and elasticity:
- Inelastic demand: total revenue increases with price increase
- Elastic demand: total revenue decreases with price increase

Income Elasticity of Demand

Measures how much the quantity demanded responds to changes in consumers' income
Calculated as the percentage change in quantity demanded divided by the percentage change in income
Types:
- Normal Goods: higher income raises the quantity demanded
- Inferior Goods: higher income lowers the quantity demanded

The Elasticity of Supply

Measures how much the quantity supplied responds to changes in the price of a good
Calculated as the percentage change in quantity supplied divided by the percentage change in price
Types:
- Inelastic Supply: quantity supplied does not respond strongly to price changes
- Elastic Supply: quantity supplied responds strongly to price changes
- Unit Elastic Supply: quantity supplied changes by the same percentage as the price
- Perfectly Inelastic Supply: quantity supplied does not respond to price changes
- Perfectly Elastic Supply: quantity supplied changes infinitely with any change in price

Determinants of Elasticity of Supply

Ability of sellers to change the amount of the good they produce
Time period: supply is more elastic in the long run than in the short run

Computing the Price Elasticity of Supply

Formula: (percentage change in quantity supplied) / (percentage change in price)

Applications of Elasticity

Analyzing supply and demand with greater precision
Determining how changes in price or income affect the quantity demanded or supplied

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz analyzes the concept of elasticity in economics, specifically the price elasticity of demand, and its applications in supply and demand analysis.