Questions and Answers
What does a price elasticity of demand greater than 1 indicate?
Perfectly inelastic demand means that quantity demanded does not change regardless of price changes.
True
Calculate the elasticity of demand given a price change from $300 to $340 and a quantity change from 24,000 to 22,000.
-0.695
If the total revenue increases when the price decreases, the demand is classified as __________.
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Match the type of elasticity with its characteristic:
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Which determinant does NOT affect price elasticity of supply?
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When two goods are complements, the cross-price elasticity of demand is positive.
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What is the primary determinant of price elasticity of supply?
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The formula for total revenue is __________.
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What is the value of price elasticity if supply is perfectly inelastic?
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What does price elasticity of demand measure?
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Elastic demand occurs when the percentage change in quantity demanded is less than the percentage change in price.
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What value represents unit-elastic demand?
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In perfectly _____ demand, a change in price results in no change in quantity demanded.
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Match the type of demand with its corresponding description:
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Which formula is used to consistently measure price elasticity of demand?
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Inelastic demand indicates a strong responsiveness to price changes.
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Calculate the price elasticity of demand when price decreases from $20 to $15 and sales increase from 5,000 to 7,000.
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Demand is _____ when a price change creates an infinite change in the quantity demanded.
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Match the scenario with the type of demand:
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Study Notes
Price Elasticity of Demand
- Elasticity measures the responsiveness of one economic variable to a change in another, e.g., quantity demanded in relation to price changes.
- Price elasticity of demand indicates how much the quantity demanded of a good changes when its price changes.
- Elastic demand occurs when the percentage change in quantity demanded exceeds the percentage change in price, with elasticity values greater than one.
- Inelastic demand occurs when the percentage change in quantity demanded is less than the percentage change in price, resulting in elasticity values less than one.
- Unit-elastic demand features equal percentage changes in both quantity demanded and price, yielding an elasticity value of one.
Midpoint Formula
- The midpoint formula equalizes the calculation of price elasticity of demand regardless of price increases or decreases.
- Example calculation: A price drop from 20to20 to 20to15 increases ticket sales from 5,000 to 7,000; this can be used to find the elasticity using the midpoint formula.
Polar Cases of Elasticity
- Perfectly inelastic demand: Price changes do not affect quantity demanded (elasticity equals zero).
- Perfectly elastic demand: Price changes lead to an infinite change in quantity demanded (elasticity is infinite).
Calculating Price Elasticity of Demand
- Example: For wheat, the formula calculates a percentage price change of 12.5% and a quantity change of -8.696%, resulting in a price elasticity of -0.695.
Summary of Price Elasticities of Demand
- Elastic Demand: Absolute price elasticity > 1
- Inelastic Demand: Absolute price elasticity < 1
- Unit Elastic Demand: Absolute price elasticity = 1
- Perfectly Elastic Demand: Absolute price elasticity = ∞
- Perfectly Inelastic Demand: Absolute price elasticity = 0
Determinants of Price Elasticity of Demand
- Availability of close substitutes affects consumer responsiveness.
- Time length influences elasticity, with more time generally leading to greater elasticity.
- Luxuries tend to have more elastic demand than necessities.
- Market definition impacts how demand reacts to price changes.
- The proportion of a consumer's budget spent on a good influences its elasticity.
Relationship Between Price Elasticity and Total Revenue
- Total Revenue (TR) is calculated as TR = Price (P) × Quantity (Q).
- Inelastic demand: Price increases lead to higher total revenue.
- Elastic demand: Price increases result in lower total revenue.
- Elasticity varies along a linear demand curve.
Cross-Price Elasticity of Demand
- Measures how the quantity demanded of one good responds to price changes of another good.
- Positive cross-price elasticity indicates substitute goods; negative indicates complementary goods.
Income Elasticity of Demand
- Measures responsiveness of quantity demanded to changes in income.
- Calculated as the percentage change in quantity demanded divided by the percentage change in disposable income.
Price Elasticity of Supply
- Describes the responsiveness of quantity supplied to price changes.
- It is always positive, as price and quantity supplied move in the same direction.
- Key determinants include production cost increases, time length, industry type, input availability, existing capacity, and inventory levels.
Polar Cases of Supply Elasticity
- Perfectly elastic supply is represented by a horizontal line.
- Perfectly inelastic supply is depicted as a vertical line.
Summary of Price Elasticities of Supply
- Elastic Supply: Price elasticity > 1
- Inelastic Supply: Price elasticity < 1
- Unit Elastic Supply: Price elasticity = 1
- Perfectly Elastic Supply: Price elasticity = ∞
- Perfectly Inelastic Supply: Price elasticity = 0
Predicting Price Changes Using Elasticity of Supply
- Changes in demand affect price changes, which depend on price elasticity of supply.
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Description
This quiz explores the concept of price elasticity of demand, including its definition and measurement. Understand how quantity demanded responds to price changes and differentiate between elastic and inelastic demand through interactive questions.
