Microeconomics: Elasticity of Demand
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Questions and Answers

What does the price elasticity of demand measure?

  • The responsiveness of quantity demanded to changes in consumer income
  • The responsiveness of quantity demanded to changes in its price (correct)
  • The responsiveness of quantity supplied to changes in its price
  • The responsiveness of quantity demanded to changes in the price of another good

    • If the elasticity of demand is 0.5, what can be said about the changes in quantity demanded and price?

  • There is no change in quantity demanded regardless of the price change
  • A price change leads to a proportionate change in quantity demanded
  • A large price change leads to a small change in quantity demanded (correct)
  • A small price change leads to a large change in quantity demanded

    • Which of the following factors would increase the elasticity of demand?

  • A shorter time period
  • An increase in the degree of necessity
  • A decrease in the availability of substitutes
  • An increase in the availability of substitutes (correct)

    • What is the formula for calculating price elasticity of demand?

    <p>(percentage change in quantity demanded) / (percentage change in price)</p> Signup and view all the answers

    What type of elasticity measures how responsive quantity demanded is to changes in consumer income?

    <p>Income elasticity of demand</p> Signup and view all the answers

    What is the term for a good with an elasticity of 0?

    <p>Unit elastic</p> Signup and view all the answers

    What is the term for a good with an elasticity of 1?

    <p>Unit elastic</p> Signup and view all the answers

    Which of the following would lead to a decrease in the elasticity of demand?

    <p>An increase in the degree of necessity</p> Signup and view all the answers

    What is the term for a good with an elasticity of infinity?

    <p>Perfectly elastic</p> Signup and view all the answers

    What type of elasticity measures how responsive the quantity demanded of one good is to changes in the price of another good?

    <p>Cross-price elasticity of demand</p> Signup and view all the answers

    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.

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    Description

    Learn about the different types of elasticity of demand, including price elasticity and income elasticity, and how they are calculated.

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