Econ 102

Why is elasticity used in economics?

Elasticity alleviates dependency on specific units, allows comparability across goods and countries, and helps in policymaking.

What does price elasticity of demand measure?

It measures how responsive quantity demanded is to a change in price.

How is price elasticity of demand calculated?

Price Elasticity of Demand = % change in quantity demanded / % change in price.

What is the law of demand?

It states that price and quantity demanded move in opposite directions.

What does elastic demand (Ed > 1) signify?

Quantity demanded is highly responsive to price changes.

What does inelastic demand (Ed < 1) signify?

Quantity demanded is less responsive to price changes.

What is unit-elastic demand (Ed = 1)?

Quantity demanded changes by the same percentage as the price change.

What characterizes perfectly elastic demand (Ed = infinity)?

Even a slight price increase causes demand to drop to zero.

What characterizes perfectly inelastic demand (Ed = 0)?

Quantity demanded does not change regardless of price changes.

What is the significance of the midpoint formula in elasticity?

It provides a consistent calculation of percentage changes in price and quantity.

How does time affect elasticity of demand?

Over time, demand becomes more elastic as consumers adjust their behavior.

What is cross-price elasticity of demand?

It measures how a change in the price of one good affects the quantity demanded of another good.

How do substitutes relate to cross-price elasticity?

Substitutes have positive cross-price elasticity (CPE > 0).

What defines a normal good in income elasticity of demand?

Demand increases as income rises, indicated by a positive coefficient.

What defines an inferior good in income elasticity of demand?

Demand decreases as income increases, indicated by a negative coefficient.

What is the relationship between elasticity and total revenue when demand is elastic?

A price decrease leads to a larger increase in quantity demanded, increasing total revenue.

What is the significance of the absolute value of price elasticity of demand?

It determines whether demand is elastic, inelastic, or unit-elastic.

How do necessities and luxuries differ in terms of elasticity?

Necessities tend to be inelastic while luxuries are elastic.

How does elasticity relate to pricing strategies in business?

Understanding elasticity helps businesses optimize pricing to maximize revenue.