Podcast
Questions and Answers
If a product has an elastic demand, how will a price decrease affect total revenue?
If a product has an elastic demand, how will a price decrease affect total revenue?
- Total revenue will increase. (correct)
- The effect on total revenue is unpredictable.
- Total revenue will remain unchanged.
- Total revenue will decrease.
Which of the following goods is most likely to have an inelastic demand?
Which of the following goods is most likely to have an inelastic demand?
- Movie tickets
- Restaurant meals
- Clothing
- Salt (correct)
If the price elasticity of demand for a product is 1.5, what does this indicate?
If the price elasticity of demand for a product is 1.5, what does this indicate?
- The demand is unit elastic.
- The demand is perfectly inelastic.
- The demand is inelastic.
- The demand is elastic. (correct)
According to the total-revenue test, if a price increase leads to a decrease in total revenue, the demand is:
According to the total-revenue test, if a price increase leads to a decrease in total revenue, the demand is:
Which of the following is NOT a determinant of the price elasticity of demand?
Which of the following is NOT a determinant of the price elasticity of demand?
If the cross elasticity of demand between two goods is positive, those goods are:
If the cross elasticity of demand between two goods is positive, those goods are:
If the income elasticity of demand for a good is negative, that good is considered to be:
If the income elasticity of demand for a good is negative, that good is considered to be:
Which of the following best describes price elasticity of supply?
Which of the following best describes price elasticity of supply?
In the immediate market period, the supply curve is typically:
In the immediate market period, the supply curve is typically:
Which of the following is most likely to have an elastic supply?
Which of the following is most likely to have an elastic supply?
If a 10% increase in price leads to a 5% decrease in quantity demanded, the price elasticity of demand is:
If a 10% increase in price leads to a 5% decrease in quantity demanded, the price elasticity of demand is:
If a firm decreases the price of its product and total revenue remains unchanged, the demand for its product is:
If a firm decreases the price of its product and total revenue remains unchanged, the demand for its product is:
Which of the following products is most likely to have the most price elastic demand?
Which of the following products is most likely to have the most price elastic demand?
What does a perfectly inelastic demand curve look like?
What does a perfectly inelastic demand curve look like?
What does the price elasticity of supply measure?
What does the price elasticity of supply measure?
For which of the following products would the price elasticity of demand be highest?
For which of the following products would the price elasticity of demand be highest?
Which of the following will happen when the demand for a product is elastic and the price increases?
Which of the following will happen when the demand for a product is elastic and the price increases?
What is indicated when the cross-price elasticity of demand is negative?
What is indicated when the cross-price elasticity of demand is negative?
Which of the following factors tends to make the supply of a product more elastic?
Which of the following factors tends to make the supply of a product more elastic?
What is the likely impact of a large crop yield on farmers' total revenue, assuming the demand for the crop is inelastic?
What is the likely impact of a large crop yield on farmers' total revenue, assuming the demand for the crop is inelastic?
Which of the following describes cross elasticity of demand?
Which of the following describes cross elasticity of demand?
How does the proportion of a consumer's income spent on a good relate to its price elasticity of demand?
How does the proportion of a consumer's income spent on a good relate to its price elasticity of demand?
Why is the concept of price elasticity of demand important for businesses?
Why is the concept of price elasticity of demand important for businesses?
If the price of good A increases from $5 to $6 and the quantity demanded of good B increases from 10 units to 12 units, what is the cross-price elasticity of demand?
If the price of good A increases from $5 to $6 and the quantity demanded of good B increases from 10 units to 12 units, what is the cross-price elasticity of demand?
If the income elasticity of demand for a good is +2, the good is:
If the income elasticity of demand for a good is +2, the good is:
How does time affect the price elasticity of demand?
How does time affect the price elasticity of demand?
Which good is most likely to have a perfectly inelastic supply in the short run?
Which good is most likely to have a perfectly inelastic supply in the short run?
What is its primary determinant for the price elasticity of supply?
What is its primary determinant for the price elasticity of supply?
What will happen with excise taxes with inelastic demand?
What will happen with excise taxes with inelastic demand?
What will happen with large crop yields with inelastic supply?
What will happen with large crop yields with inelastic supply?
What is the income elasticity of demand formula?
What is the income elasticity of demand formula?
What is the formula for Cross Elasticity of Demand?
What is the formula for Cross Elasticity of Demand?
What is the Price Elasticity Coefficient formula?
What is the Price Elasticity Coefficient formula?
What is the Price Elasticity of Supply Formula?
What is the Price Elasticity of Supply Formula?
What is the formula to use to ensure consistent results when calculating elasticity?
What is the formula to use to ensure consistent results when calculating elasticity?
At what value is demand perfectly elastic?
At what value is demand perfectly elastic?
What are the time periods to consider when analyzing price elasticity of supply and time?
What are the time periods to consider when analyzing price elasticity of supply and time?
Which of the following represents an accurate interpretation of elasticity of demand?
Which of the following represents an accurate interpretation of elasticity of demand?
In the context of cross elasticity of demand, what does it mean if goods are independent?
In the context of cross elasticity of demand, what does it mean if goods are independent?
In relation to total revenue (TR), what happens when demand is inelastic?
In relation to total revenue (TR), what happens when demand is inelastic?
Flashcards
Price elasticity of demand
Price elasticity of demand
Measures how much the quantity demanded changes with price changes.
Elastic demand
Elastic demand
Demand is sensitive to price changes; quantity demanded changes a lot.
Inelastic demand
Inelastic demand
Demand is not very sensitive to price changes; quantity demanded changes a little.
Price Elasticity Coefficient
Price Elasticity Coefficient
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Midpoint Formula
Midpoint Formula
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Elastic Demand Value
Elastic Demand Value
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Inelastic Demand Value
Inelastic Demand Value
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Unit Elastic Demand
Unit Elastic Demand
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Perfectly Elastic Demand
Perfectly Elastic Demand
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Perfectly Inelastic Demand
Perfectly Inelastic Demand
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Total Revenue Formula
Total Revenue Formula
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Elastic Demand and TR
Elastic Demand and TR
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Inelastic Demand and TR
Inelastic Demand and TR
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Unit Elasticity and TR
Unit Elasticity and TR
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Substitutability
Substitutability
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Proportion of Income
Proportion of Income
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Luxury vs Necessity
Luxury vs Necessity
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Time and Elasticity
Time and Elasticity
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Price Elasticity of Supply
Price Elasticity of Supply
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Elastic Supply
Elastic Supply
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Inelastic Supply
Inelastic Supply
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Price Elasticity of Supply Formula
Price Elasticity of Supply Formula
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Elastic Supply Value
Elastic Supply Value
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Inelastic Supply Value
Inelastic Supply Value
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Perfectly Inelastic Supply
Perfectly Inelastic Supply
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Elasticity of Supply and Time
Elasticity of Supply and Time
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Immediate Market Period
Immediate Market Period
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Short Run
Short Run
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Long Run
Long Run
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Cross Elasticity of Demand
Cross Elasticity of Demand
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Cross price elasticity of demand Formula
Cross price elasticity of demand Formula
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Substitute Goods
Substitute Goods
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Complemetary Goods
Complemetary Goods
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Independent Goods
Independent Goods
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Income Elasticity of Demand
Income Elasticity of Demand
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Income Elasticity of Demand Formula
Income Elasticity of Demand Formula
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Normal Goods Value
Normal Goods Value
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Inferior Good Value
Inferior Good Value
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Study Notes
Price Elasticity of Demand
- Measures how responsive buyers are to price changes
- Elastic demand means buyers are sensitive to price changes with a large change in quantity demanded
- Inelastic demand means buyers are insensitive to price changes with a small change in quantity demanded
Price Elasticity Coefficient
- Calculated as the percentage change in quantity demanded of product X divided by the percentage change in price of product X
Midpoint Formula
- Used to ensure consistent elasticity results
- Formula: Ed = (Change in quantity / Sum of quantities/2) ÷ (Change in price / Sum of prices/2)
Price Elasticity of Demand Formula
- Uses percentages for unit-free measure
- Allows comparison of elasticities across various products
- Eliminates the minus sign for easier comparison of elasticities
Interpretation of Elasticity of Demand
- If Ed > 1, demand is elastic
- If Ed < 1, demand is inelastic
- If Ed = 1, demand is unit elastic
- Extreme cases include perfectly inelastic (Ed = 0) and perfectly elastic (Ed = ∞) demand
Total Revenue Test Overview
- Total Revenue is calculated as Price x Quantity
- Elastic demand means Price and Total Revenue move in opposite directions
- Inelastic demand means Price and Total Revenue move in the same direction
- Unit elastic demand means Total Revenue does not change when Price changes
Substitutability and Proportion of Income
- Substitutability: more substitutes available means demand is more elastic
- Proportion of income: a higher proportion of income used, means demand is more elastic
Luxury and Time
- Luxury goods show more elastic demand
- The more time available, the more elastic the demand
Applications of Price Elasticity of Demand
- Large crop yields paired with inelastic demand results in lower total revenue
- Excise taxes coupled with inelastic demand leads to more total revenue
- Decriminalization of illegal drugs, coupled with inelastic demand leads to more total revenue
Price Elasticity of Supply Overview
- Measures sellers' responsiveness to price changes
- Elastic supply indicates producers are responsive to price changes
- Inelastic supply indicates producers are not as responsive to price changes
Price Elasticity of Supply Formula
- Es = Percentage change in quantity supplied of product X Divided by the percentage change in price of product X
Price Elasticity of Supply Interpretation
- If Es > 1, supply is elastic
- If Es = 1, supply is unit elastic
- If Es < 1, supply is inelastic
- In the case of Es = 0, supply is perfectly inelastic
Price Elasticity of Supply and Time
- Time is the primary determinant of elasticity of supply, including the immediate market period, short run, and long run
Applications of Elasticity of Supply
- Antiques have inelastic supply
- Reproductions have more elastic supply
- Volatile gold prices are due to inelastic supply
Formula for Cross Elasticity of Demand
- Calculated as the % change in quantity demanded of product X divided by the % change in price of product Y
Cross Elasticity of Demand
- Measures responsiveness of purchases of one good to a price change in another
- Substitute goods have a positive elasticity
- Complementary goods have a negative elasticity
- Independent goods have zero or near-zero elasticity
Applications of Cross Elasticity of Demand
- Used to make decisions such as whether a company should change price, or if a government should allow a merger
Formula for Income Elasticity of Demand
- Calculated as the percentage change in quantity demanded divided by the percentage change in income
Income Elasticity of Demand
- Measures how responsive buyers are to changes in their income
- Normal goods have a positive elasticity
- Inferior goods have a negative elasticity
Income Elasticity Insights
- High income elasticities: affected by a recession
- Low or negative income elasticity: Not affected that much by a recession
Last Word: Elasticity and Pricing Power
- Charge prices based on price elasticities
- Business air travelers have different elasticities than economy, for example.
- Children discounts and college tuition are other examples.
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