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Questions and Answers
What does price elasticity of demand primarily measure?
What does price elasticity of demand primarily measure?
- The sensitivity of price to changes in consumer income.
- The magnitude of change in the quantity demanded from a change in its price. (correct)
- The magnitude of change in quantity supplied due to a change in price.
- The relationship between the price of a good and the cost of its inputs.
When calculating price elasticity using the midpoint method, what is being estimated?
When calculating price elasticity using the midpoint method, what is being estimated?
- The elasticity at the final point on the demand curve.
- The elasticity at the midpoint of any two points. (correct)
- The average elasticity over the entire demand curve.
- The elasticity at the initial point on the demand curve.
If the price elasticity of demand for a product is 2.5, how would you characterize the demand for this product?
If the price elasticity of demand for a product is 2.5, how would you characterize the demand for this product?
- Elastic. (correct)
- Perfectly inelastic.
- Inelastic.
- Unit elastic.
Which of the following factors tends to make the demand for a good more elastic?
Which of the following factors tends to make the demand for a good more elastic?
What does it mean if the demand for a product is perfectly inelastic?
What does it mean if the demand for a product is perfectly inelastic?
If a firm lowers its price and total revenue increases, what does this indicate about the price elasticity of demand for its product?
If a firm lowers its price and total revenue increases, what does this indicate about the price elasticity of demand for its product?
What is the formula for calculating total revenue (TR)?
What is the formula for calculating total revenue (TR)?
In the context of price elasticity of demand, what is the 'price effect'?
In the context of price elasticity of demand, what is the 'price effect'?
How does the price elasticity of demand affect the change in total revenue when the price of a good decreases?
How does the price elasticity of demand affect the change in total revenue when the price of a good decreases?
What does price elasticity of supply measure?
What does price elasticity of supply measure?
Which factor is MOST directly associated with the determinants of price elasticity of supply?
Which factor is MOST directly associated with the determinants of price elasticity of supply?
What is the interpretation of price elasticity of supply always being positive?
What is the interpretation of price elasticity of supply always being positive?
What does the cross-price elasticity of demand measure?
What does the cross-price elasticity of demand measure?
If the cross-price elasticity of demand between two goods is positive, how are the goods related?
If the cross-price elasticity of demand between two goods is positive, how are the goods related?
What is the main indicator of whether two goods are complements based on cross-price elasticity of demand?
What is the main indicator of whether two goods are complements based on cross-price elasticity of demand?
What does income elasticity of demand measure?
What does income elasticity of demand measure?
If the income elasticity of demand for a good is negative, what type of good is it?
If the income elasticity of demand for a good is negative, what type of good is it?
When is a good considered a 'luxury' based on its income elasticity of demand?
When is a good considered a 'luxury' based on its income elasticity of demand?
Suppose a consumer's income increases from $100 to $200, and their consumption of a certain good increases from 10 units to 15 units. Using the midpoint formula, calculate income elasticity of demand?
Suppose a consumer's income increases from $100 to $200, and their consumption of a certain good increases from 10 units to 15 units. Using the midpoint formula, calculate income elasticity of demand?
Calculate the price elasticity of demand using the midpoint method, given the following points along a demand curve: ($10, 350) and ($20, 150).
Calculate the price elasticity of demand using the midpoint method, given the following points along a demand curve: ($10, 350) and ($20, 150).
What is the implication of the calculated price elasticity of demand for a good being -0.7?
What is the implication of the calculated price elasticity of demand for a good being -0.7?
If a product has a price elasticity of supply equal to 1, what does this indicate about the percentage change in quantity supplied in response to a percentage change in price?
If a product has a price elasticity of supply equal to 1, what does this indicate about the percentage change in quantity supplied in response to a percentage change in price?
Assume that when the price of good A increases by 10%, the quantity demanded of good B decreases by 5%. Compute the cross-price elasticity of demand and determine the relationship between the two goods.
Assume that when the price of good A increases by 10%, the quantity demanded of good B decreases by 5%. Compute the cross-price elasticity of demand and determine the relationship between the two goods.
Suppose the price of coffee increases from $2 to $2.50 per cup, and as a result, the quantity demanded decreases from 500 cups to 400 cups daily. What is the price elasticity of demand using the midpoint method, and is the demand elastic or inelastic?
Suppose the price of coffee increases from $2 to $2.50 per cup, and as a result, the quantity demanded decreases from 500 cups to 400 cups daily. What is the price elasticity of demand using the midpoint method, and is the demand elastic or inelastic?
Knowing that the income elasticity of demand for good X is 1.5 implies?
Knowing that the income elasticity of demand for good X is 1.5 implies?
Assume that total revenue increases when the price of a certain good is decreased. What can be inferred about the price elasticity of demand for this good?
Assume that total revenue increases when the price of a certain good is decreased. What can be inferred about the price elasticity of demand for this good?
How do firms maximize their revenue using the understanding of price elasticity of demand?
How do firms maximize their revenue using the understanding of price elasticity of demand?
What does elasticity indicate in the context of supply and demand regarding business and policy questions?
What does elasticity indicate in the context of supply and demand regarding business and policy questions?
What condition must be met for a good to be considered a luxury in terms of income elasticity of demand?
What condition must be met for a good to be considered a luxury in terms of income elasticity of demand?
What does a price elasticity of supply of less than 1 indicate?
What does a price elasticity of supply of less than 1 indicate?
If a good has many close substitutes, how does this affect its price elasticity of demand?
If a good has many close substitutes, how does this affect its price elasticity of demand?
Flashcards
What is Elasticity?
What is Elasticity?
A measure of the responsiveness to a change in market conditions, applicable to supply and demand.
Price elasticity of demand
Price elasticity of demand
Measures how much the quantity demanded changes with a change in its price, estimating price sensitivity.
Midpoint Method
Midpoint Method
Calculates elasticity at the midpoint between two points on a curve.
Price sensitivity factors
Price sensitivity factors
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Elastic Demand
Elastic Demand
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Inelastic Demand
Inelastic Demand
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Perfectly Elastic
Perfectly Elastic
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Perfectly Inelastic
Perfectly Inelastic
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Why is Elasticity useful?
Why is Elasticity useful?
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What is Total Revenue?
What is Total Revenue?
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Price Elasticity of Supply
Price Elasticity of Supply
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Cross-Price Elasticity of Demand
Cross-Price Elasticity of Demand
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Income Elasticity of Demand
Income Elasticity of Demand
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Normal Good
Normal Good
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Inferior Good
Inferior Good
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Study Notes
Elasticity
- It is a measure of the responsiveness to a change in a market condition.
- Applies to both supply, and demand
Price elasticity of demand
- Measures the change in magnitude of quantity demanded from a change in its price
- Estimates the price sensitivity
Calculating price elasticity
- A midpoint method calculates the elasticity at the midpoint of any two points
- The midpoint elasticity is the difference of any two numbers divided by their average
- Elasticity is unitless
Determinants of price elasticity of demand
- Availability of substitutes determine consumers' responsiveness to price changes
- Degree of necessity is a factor
- Cost relative to income affects price change responsiveness
- Adjustment time is a determinant
- Scope of the market is a factor
Categorizing elasticities
- Goods and services can be categorized based on elasticity
- Elastic Category: A change in price causes a relatively large percentage change in quantity demanded
- Inelastic: A change in price causes a relatively small percentage change in quantity demanded
- At the extremes, demand can be either perfectly Elastic or perfectly Inelastic
- 3 categories between these extremes: elastic, unit-elastic, and inelastic
Using price elasticity of demand
- Knowing whether the demand for a good is elastic or inelastic is useful in business
- Allows managers to determine whether a price increase will cause total revenue to rise or fall
- Total revenue is the amount that a firm receives from the sale of goods and services
- Total revenue (TR) equals price paid (P) multiplied by quantity sold (Q), or TR = P x Q.
Price elasticity of supply
- It can also be applied to supply
- Measures producers' response in quantity to a change in price
- Same midpoint formula is used but replaces quantity demanded with quantity supplied
- Elasticity is always positive
- Elastic: ες >1
- Unit Elastic: ες =1
- Inelastic: ες <1
Determinants of price elasticity of supply
- Producers are more sensitive to price changes for some goods and services than others
- Availability of inputs determine producers' responsiveness to price changes
- Flexibility of the production process is a determinant
- Adjustment time is a factor
Cross-price elasticity of demand
- A measure of how the the quantity demanded of one good changes when the price of a different good changes
- The midpoint formula calculates the elasticity between the quantity demanded of good A, and the price of good B
- Can be positive or negative:
-
0: the two goods are substitutes
- <0: the two goods are complements
-
Income elasticity of demand
- A measure of how much quantity demanded changes in response to a change in consumers' incomes
- The midpoint formula calculates the elasticity between the quantity demanded of a good and consumer's income
- Can be positive or negative:
-
0: the good is normal, If >1, then it is a luxury
- <0: the good is inferior
-
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