Questions and Answers
What is elasticity a measure of?
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.
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Match the following demand curve types with their characteristics:
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Define income elasticity of demand (YED).
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Which of the following is an example of a normal good?
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Goods consumers regard as luxuries tend to be income elastic.
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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 __.
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Explain price elasticity of supply.
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Match the Price Elasticity of Supply types with their descriptions:
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Why is supply more elastic in the long run?
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How is price elasticity of supply calculated?
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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
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Description
This quiz analyzes the concept of elasticity in economics, specifically the price elasticity of demand, and its applications in supply and demand analysis.
