Price Elasticity of Demand Quiz

Chapter 4: Elasticity

• Learning Objectives:
  • Explain price elasticity of demand and its determinants.
  • Calculate price elasticity and explain the coefficient of elasticity.
  • Describe the relationship between the slope of a demand curve and elasticity, and how this affects the producer's total revenue.
  • Use real-world examples to demonstrate the power of the elasticity concept.
  • Describe the meaning and significance of elasticity of supply, income elasticity, and cross-elasticity of demand.

Price Elasticity of Demand

• Definition: Price elasticity of demand measures how responsive the quantity demanded of a product is to a change in its price.
• Formula: ε_p = (%∆ quantity demanded) / (%∆ price)
• Coefficient of Elasticity: Represented by 'ε' (epsilon), it's an absolute number; the sign is ignored.
• Inelastic Demand: Quantity demanded is not very responsive to price changes. Elasticity coefficient is less than 1.
• Elastic Demand: Quantity demanded is quite responsive to price changes. Elasticity coefficient is greater than 1.
• Unitary Demand: Percentage change in quantity demanded is exactly equal to the percentage change in price. Elasticity coefficient is equal to 1.

Determinants of Price Elasticity

• Number of available substitutes
• Percentage of household income spent on the product
• Time period involved

Examples of Elasticities

• Table 4.2 lists examples demonstrating elastic and inelastic demands for various products. (Specific values are included in the table.)

Test Your Understanding (Questions and Answers)

• Presents scenarios inquiring about elasticity of demand for particular products (e.g., sugar, gasoline, ocean cruises, etc.) and asks to determine whether demand would be categorized as elastic or inelastic. Answers are given.

LO2: Measuring Price Elasticity

• Formula for calculating price elasticity Equation: ε_p = (ΔQd / average Qd) / (ΔP / average P) ×100

Elasticity vs. Slope

• Slope is rise over run. A straight-line demand curve has a constant slope.
• Elasticity is the percentage change in quantity over the percentage change in price.
• A straight-line demand curve's elasticity is variable across points on the curve.
• The upper half of the curve is elastic, and the lower half is inelastic.

Types of Elasticity

• Inelastic Demand: Percentage price change results in a smaller percentage quantity change.
• Unit Elastic Demand: Percentage price change and percentage quantity change are equal.
• Elastic Demand: Percentage price change results in a larger percentage quantity change.

Elasticity and Total Revenue

• If demand is elastic, an increase in price will cause total revenue to decrease. Conversely, a decrease in price will increase total revenue.
• The opposite is true when demand is inelastic.

Other Elasticity Measures

• Elasticity of Supply: Measures how quantity supplied changes with regard to price changes. Formula provided.

• Supply Elasticity in Three Periods:

  • Market Period = Perfectly inelastic supply
  • Short Run = Inelastic supply
  • Long Run = Elastic supply

• Income Elasticity: Measures responsiveness of quantity demanded to income changes. Formula included.

• Cross-Elasticity of Demand: Measures responsiveness of quantity demanded of one good due to a change in the price of another good. Formula included

• Summary of various elasticities: A diagram illustrating the ranges for price, income, and cross-elasticities.

Key Concepts to Remember

• Definition, calculation, and determinants of price elasticity of demand
• Difference between slope and elasticity
• Relationship between elasticity and total revenue
• Real-world examples of elasticity
• Elasticity of supply, income elasticity, and cross-elasticity of demand

Test your understanding of price elasticity of demand with this quiz. Explore key concepts such as determinants of elasticity, the relationship between elasticity and total revenue, and consumer income effects. Perfect for students studying economics and market behaviors.