module 9 and 10 - elasticity quiz

perfectly inelastic

when quantity demanded does not respond at all to changes in the price (demand curve is a vertical line)

perfectly elastic

when any price increase will cause quantity demanded to drop to zero (demand curve is a horizontal line)

elastic

price of a elasticity of demand is greater than 1, price up revenue down (quantity effect > price effect)

inelastic

price of elasticity of demand is less than 1, price up revenue up, quantity effect < price effect

unit-elastic

price of elasticity of demand is exactly 1, price does not change revenue, price effect = quantity effect

price effect

after a price increase, each unity sold sells at a higher price which tends to raise revenue

quantity effect

after a price increase, fewer units are sold which tends to lower revenue

for the vast majority of goods, the price elasticity of demand chages along the

demand curve

what factors determine the price elasticity of demand

• whether close substitutes are available (subs available up, elasticity up)

• whether the good is a necessity or a luxury (necessity up, elasticity down)

• share of income spent on the good (share of income up, elasticity up)

• time to adjust (time up, elasticity up)

cross-price elasticity of demand

measures the effect of the change of ones good’s price on the quantity demanded of the other good (% change in quantity demanded of A / % change in price of B)

if two goods are close substitutes, cross-price elasticity of demand is

postitive and large

if two goods are not close substitutes, cross-price elasticity of demand is

positive and small

if two goods are strong complements, cross-price elasticity o demand is

negative and far from 0

if two goods are weak complements, cross-price elasticity of demand is

negative and close to zero

elasticity is a unit ____ measurement

free

income elasticity o demand

measures how changes in income affect the demand for a good (% change in quantity demanded / % change in income)

if a good is a normal good, income elasticity of demand is…

positive

if a good is an inferior good, income elasticity of demand is…

negative

income-elastic

if the income elasticity of demand of a good is greater than 1 (when income rises, the demand rises faster than income)

income-inelastic

if the income elasticity of demand of a good is between 0 and 1 (when income rises, the demand rises but more slowly than income)

price elasticity of supply

a measure of the responsiveness of the quantity supplied of a good supplied to the price of that good (% change in quantity supplied / % change in price)

perfectly inelastic supply

when the price elasticity of supply is zero, so changes in the price of the good have no efect on the quantity supplied (vertical line)

perfectly elastic supply

if the quantity supplied is zero below some price and infinite above that same price (horizontal line)

factors that determine the price elasticity of supply

the availability of inputs: large when available and can be shifted into and out of production at a low cost, small when inputs are fixed and can only be shifted i and out of production at a high cost
time: larger as producers have more time to respond to price change (long-term price elasticity > short-term price elasticity)

for goods that are limited to natural resources, price elasticity of supply is….

less than perfectly elastic