Chapter 5: Elasticity and Its Applications

Flashcards covering key concepts of Chapter 5: Elasticity definitions, determinants, classifications, and the relationship between elasticity and total revenue.

What does the elasticity of demand measure?

How responsive the quantity demanded is to a change in price.

What is the formula for price elasticity of demand (Ed)?

Ed = (% change in quantity demanded) / (% change in price).

Why is price elasticity of demand typically negative?

Because price and quantity demanded move in opposite directions according to the Law of Demand.

How do we classify demand when |Ed| > 1?

Demand is elastic.

How do we classify demand when |Ed| < 1?

Demand is inelastic.

How do we classify demand when |Ed| = 1?

Demand is unit elastic.

If two linear demand curves run through a common point, which one is more elastic?

The flatter curve is more elastic.

What is the strongest single determinant of demand elasticity?

The closeness and availability of substitutes.

How does the amount of time consumers have to adjust affect elasticity?

More time to adjust increases elasticity because consumers can find more substitutes.

How does the specificity of a product (e.g., a brand vs. a category) affect elasticity?

More specific products (individual brands) usually have greater elasticity due to more close substitutes.

Which type of good, necessities or luxuries, tends to have the greater price elasticity of demand?

Luxuries tend to have greater elasticity.

How does the share of a good in a consumer’s budget influence elasticity?

Goods that take up a larger share of the budget have higher elasticity.

If demand is inelastic, what happens to total revenue when price increases?

Total revenue increases.

If demand is elastic, what happens to total revenue when price increases?

Total revenue decreases.

If the price elasticity of demand for wine is 1.2 and the price rises, what happens to total revenue?

Total revenue decreases because demand is elastic.