10 Questions
What does the price elasticity of demand measure?
The responsiveness of quantity demanded to changes in its price
If the elasticity of demand is 0.5, what can be said about the changes in quantity demanded and price?
A large price change leads to a small change in quantity demanded
Which of the following factors would increase the elasticity of demand?
An increase in the availability of substitutes
What is the formula for calculating price elasticity of demand?
(percentage change in quantity demanded) / (percentage change in price)
What type of elasticity measures how responsive quantity demanded is to changes in consumer income?
Income elasticity of demand
What is the term for a good with an elasticity of 0?
Unit elastic
What is the term for a good with an elasticity of 1?
Unit elastic
Which of the following would lead to a decrease in the elasticity of demand?
An increase in the degree of necessity
What is the term for a good with an elasticity of infinity?
Perfectly elastic
What type of elasticity measures how responsive the quantity demanded of one good is to changes in the price of another good?
Cross-price elasticity of demand
Study Notes
Elasticity of Demand
Definition
- Measures how responsive the quantity demanded of a good is to changes in its price or other influential factors.
Types of Elasticity
-
Price Elasticity of Demand: measures how responsive quantity demanded is to changes in price.
- Calculated as: (percentage change in quantity demanded) / (percentage change in price)
-
Income Elasticity of Demand: measures how responsive quantity demanded is to changes in consumer income.
- Calculated as: (percentage change in quantity demanded) / (percentage change in income)
-
Cross-Price Elasticity of Demand: measures how responsive quantity demanded of one good is to changes in the price of another good.
- Calculated as: (percentage change in quantity demanded of good A) / (percentage change in price of good B)
Elasticity Ranges
- Elastic (elasticity > 1): small price change leads to a large change in quantity demanded.
- Unit Elastic (elasticity = 1): price change leads to a proportionate change in quantity demanded.
- Inelastic (elasticity < 1): large price change leads to a small change in quantity demanded.
- Perfectly Elastic (elasticity = ∞): even the smallest price change leads to an infinite change in quantity demanded.
- Perfectly Inelastic (elasticity = 0): no change in quantity demanded regardless of price change.
Factors Affecting Elasticity
- Availability of substitutes: more substitutes, higher elasticity.
- Degree of necessity: essential goods, lower elasticity.
- Time period: longer time period, higher elasticity.
- Proportion of income: goods that take up a large proportion of income, higher elasticity.
- Consumer preferences: strong preferences, lower elasticity.
Elasticity of Demand
Definition
- Measures the responsiveness of quantity demanded to changes in price or other influential factors.
Types of Elasticity
-
Price Elasticity of Demand: responsiveness of quantity demanded to changes in price.
- Calculated as: (percentage change in quantity demanded) / (percentage change in price)
-
Income Elasticity of Demand: responsiveness of quantity demanded to changes in consumer income.
- Calculated as: (percentage change in quantity demanded) / (percentage change in income)
-
Cross-Price Elasticity of Demand: responsiveness of quantity demanded of one good to changes in the price of another good.
- Calculated as: (percentage change in quantity demanded of good A) / (percentage change in price of good B)
Elasticity Ranges
- Elastic (elasticity > 1): small price change leads to a large change in quantity demanded.
- Unit Elastic (elasticity = 1): price change leads to a proportionate change in quantity demanded.
- Inelastic (elasticity < 1): large price change leads to a small change in quantity demanded.
- Perfectly Elastic (elasticity = ∞): even the smallest price change leads to an infinite change in quantity demanded.
- Perfectly Inelastic (elasticity = 0): no change in quantity demanded regardless of price change.
Factors Affecting Elasticity
- Availability of substitutes: more substitutes, higher elasticity.
- Degree of necessity: essential goods, lower elasticity.
- Time period: longer time period, higher elasticity.
- Proportion of income: goods that take up a large proportion of income, higher elasticity.
- Consumer preferences: strong preferences, lower elasticity.
Learn about the different types of elasticity of demand, including price elasticity and income elasticity, and how they are calculated.
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