Elasticity

• What is the price elasticity of demand?


  It measures how much the quantity demanded of a good responds to a change in the price of that good.
• How is price elasticity of demand related to the demand curve?


  Along a demand curve, price and quantity move in opposite directions, making price elasticity negative.
• How does price elasticity of demand relate to revenue and expenditure?


  It affects how changes in price influence total revenue and consumer expenditure.
• What is the price elasticity of supply?


  It measures how much the quantity supplied of a good responds to a change in the price of that good.
• How is price elasticity of supply related to the supply curve?


  It indicates how responsive the quantity supplied is to price changes along the supply curve.
• What are the income and cross-price elasticities of demand?

  Income elasticity measures how quantity demanded changes with consumer income, while cross-price elasticity measures how quantity demanded changes with the price of another good.
• What scenario is presented regarding website design and pricing?

  • Charge $200 per website
  • Sell 12 websites per month
  • Consider raising the price to $250
  • Anticipate selling fewer websites due to the law of demand
• What does the law of demand state in the context of the website pricing scenario?


  It states that if the price increases, the quantity demanded will decrease.
• How do you calculate the price elasticity of demand using percentage changes?


  Price elasticity of demand = % change in quantity demanded / % change in price.
• If the price rises by 10% and quantity falls by 15%, what is the price elasticity of demand?


  Price elasticity of demand = $\frac{15}{10} =$$1.5$
• What is the price elasticity of demand if the price changes from $200 to $250 and quantity changes from 12 to 8?


  Price elasticity = $\frac{33}{25} =$$1.33$
• What is the midpoint method in calculating price elasticity of demand?


  The midpoint method uses the average of the starting and ending values to calculate percentage changes.
• How do you calculate the percentage change in price using the midpoint method?


  % change in P = \frac{(P_{end} - P_{start})}{\frac{(P_{end} + P_{start})}{2}} \times 100
• What is the percentage change in quantity demanded if quantity changes from 10,600 to 8,400?


  % change in Q = $\frac{(8,400 - 10,600)}{9,500} \times 100 =$$-23.16\%$
• What is the price elasticity of demand for iPhones if the price changes from $400 to $600 and quantity changes from 10,600 to 8,400?


  Price elasticity of demand = $\frac{23.16}{40} =$$0.58$
• What are the determinants of price elasticity of demand?


  • Availability of close substitutes
  • Necessity vs. luxury
  • Definition of the market (broad vs. narrow)
  • Time horizon (short run vs. long run)
• Why does breakfast cereal have a higher price elasticity of demand compared to sunscreen?


  Breakfast cereal has close substitutes, making demand more sensitive to price changes.
• Why do blue jeans have a higher price elasticity of demand than clothing?


  Blue jeans are a narrowly defined good with many substitutes, while clothing is broadly defined with fewer substitutes.
• Why does insulin have a lower price elasticity of demand compared to yachts?


  Insulin is a necessity for diabetics, while yachts are a luxury good.
• How does the price elasticity of demand for gasoline differ in the short run versus the long run?


  Price elasticity is higher in the long run as consumers can adjust their behavior more significantly.
• What are the different types of demand elasticity?

  • Elastic demand: Price elasticity > 1
  • Inelastic demand: Price elasticity < 1
  • Unit elastic demand: Price elasticity = 1
  • Perfectly inelastic demand: Price elasticity = 0
  • Perfectly elastic demand: Price elasticity = infinity
• What characterizes perfectly inelastic demand?

  Price elasticity of demand = 0, and the demand curve is vertical.
• What characterizes inelastic demand?


  Price elasticity of demand < 1, and the demand curve is relatively steep.
• What characterizes unit elastic demand?

  Price elasticity of demand = 1, and the demand curve has an intermediate slope.
• What characterizes elastic demand?


  Price elasticity of demand > 1, and the demand curve is relatively flat.
• What characterizes perfectly elastic demand?

  Price elasticity of demand = infinity, and the demand curve is horizontal.
• How does the slope of the demand curve relate to price elasticity?


  • Flatter demand curve: Greater price elasticity
  • Steeper demand curve: Lower price elasticity
• What is the formula for price elasticity of demand?


  Price elasticity of demand = % change in Q / % change in P
• What does a relatively flat demand curve indicate about consumer price sensitivity?


  It indicates that consumers have relatively high price sensitivity.
• What is the elasticity value for elastic demand?


  Elasticity is greater than 1.
• What characterizes perfectly elastic demand?

  Perfectly elastic demand has a horizontal demand curve and extreme price sensitivity.
• What is the elasticity value for perfectly elastic demand?

  Elasticity is infinity.
• How does the slope of a linear demand curve relate to its elasticity?


  The slope of a linear demand curve is constant, but its elasticity is not.
• If the price increases from $200 to $250, what two effects does this have on total revenue?


  Higher revenue from higher price and lower revenue from selling fewer units.
• What happens to total revenue when demand is elastic and price increases?


  Total revenue decreases because the fall in revenue from lower quantity is greater than the increase from higher price.
• What happens to total revenue when demand is inelastic and price increases?


  Total revenue increases because the fall in revenue from lower quantity is less than the increase from higher price.
• If the price is $200 and quantity is 12, what is the total revenue?


  Total revenue = $200 x 12 = $2400.
• If the price increases to $250 and quantity decreases to 8, what is the new total revenue?


  Total revenue = $250 x 8 = $2000.
• What is the effect of a 10% price increase on total expenditure for inelastic demand?


  Total expenditure rises because quantity falls less than 10%.
• What happens to total revenue when the price of a luxury cruise falls by 20% and demand is elastic?


  Total revenue rises because quantity increases more than 20%.