9 Questions
What does price elasticity measure?
Responsiveness of quantity demanded or supplied to a change in price
What does it mean when demand or supply is described as 'unit elastic'?
A given percentage change in price leads to an equal percentage change in quantity demanded or supplied
What does an inelastic demand or supply curve indicate?
A given percentage change in price will cause a smaller percentage change in quantity demanded or supplied
How is elasticity described when quantity demanded or supplied respond to price changes in a greater than proportional manner?
Elastic
What is the mathematical definition of income elasticity of demand?
$\epsilon_d = \frac{%\ \text{change in quantity demanded}}{%\ \text{change in income}}$
How is the income elasticity of demand calculated if quantity demanded increases by 20% in response to a 10% increase in income?
2.0
In the point elasticity version, how is the income elasticity of demand defined?
$\epsilon_d = \frac{\partial Q}{\partial I} \frac{I}{Q}$
What does an income elasticity of demand of 0.5 indicate?
The good is a normal good
If a good has a negative income elasticity of demand, what can be inferred about the good?
It is an inferior good
Study Notes
Elasticity Measurements
- Price elasticity measures how responsive the quantity demanded or supplied of a good is to a change in its price or other influential factors.
Elasticity Descriptions
- When demand or supply is described as 'unit elastic', it means that the proportionate change in quantity demanded or supplied is equal to the proportionate change in price.
Inelastic Curves
- An inelastic demand or supply curve indicates that the quantity demanded or supplied does not respond much to price changes.
Elasticity Responses
- If quantity demanded or supplied responds to price changes in a greater than proportional manner, elasticity is described as elastic.
Income Elasticity of Demand
- The mathematical definition of income elasticity of demand is the proportionate change in quantity demanded in response to a proportionate change in income.
Calculating Income Elasticity
- Income elasticity of demand is calculated by the proportionate change in quantity demanded divided by the proportionate change in income.
Point Elasticity
- In the point elasticity version, income elasticity of demand is defined as the derivative of the demand function with respect to income divided by the demand function itself.
Income Elasticity Interpretation
- An income elasticity of demand of 0.5 indicates that a 1% increase in income will lead to a 0.5% increase in quantity demanded.
Negative Income Elasticity
- If a good has a negative income elasticity of demand, it can be inferred that the good is an inferior good, meaning that as income increases, the demand for it decreases.
Test your understanding of price elasticity with this quiz. Explore concepts such as elastic, unit elastic, and inelastic demand and supply curves, and compute price elasticity using percentage changes in quantity demanded or supplied and price.
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