Ch.6

• What is elasticity in economics?


  A measure of the sensitivity of one variable to changes in another variable
• What does price elasticity of demand (PED) measure?


  The sensitivity of quantity demanded to a change in the price of a good or service
• What term is used when the price elasticity of demand is greater than 1 but less than infinity?


  Elastic
• What term is used when the price elasticity of demand is less than 1 but greater than zero?


  Inelastic
• What does unit elastic mean in terms of price elasticity of demand?


  Price elasticity of demand is equal to 1
• What is income elasticity of demand (YED)?


  A measure of the sensitivity of quantity demanded to a change in consumer incomes
• What is a superior good in terms of income elasticity of demand?


  One for which the income elasticity of demand is positive and greater than 1
• What does cross elasticity of demand (XED) measure?


  The sensitivity of quantity demanded of a good or service to a change in the price of some other good or service
• What does price elasticity of supply (PES) measure?


  The sensitivity of quantity supplied of a good or service to a change in the price of that good or service
• What does a perfectly inelastic supply curve indicate?


  Firms can supply only a fixed quantity, so cannot increase or decrease the amount available
• What does a perfectly elastic supply curve indicate?


  Firms will supply any quantity of a good at the going price
• How does price elasticity of demand (PED) relate to changes in total revenue?


  PED can be used to determine whether a firm should increase or decrease its price to gain more revenue
• What is the formula for calculating price elasticity of demand (PED)?


  PED = % change in quantity demanded / % change in price
• If the price increases by 10% and demand decreases by 20%, what is the PED?


  PED = -2
• What does a perfectly inelastic demand curve look like?


  A vertical line
• What does a unit elastic demand curve look like?


  A curve that starts steeply and gets less steep
• What does a perfectly elastic demand curve look like?


  A horizontal line
• What is the relationship between income elasticity of demand (YED) and normal goods?


  Normal goods have a positive relationship with income; as income increases, quantity demanded increases
• What is the relationship between income elasticity of demand (YED) and inferior goods?


  Inferior goods have a negative relationship with income; as income increases, quantity demanded decreases
• What does cross elasticity of demand (XED) indicate about substitute goods?


  As the price of one product increases, the quantity demanded of the other product also increases
• What does cross elasticity of demand (XED) indicate about complementary goods?


  As the price of one product increases, the quantity demanded of the other product decreases
• What is the formula for calculating cross elasticity of demand (XED)?


  XED = % change in quantity demanded of Product A / % change in price of Product B
• If the price of Product B increases by 10% and the quantity demanded of Product A decreases by 10%, what is the XED?


  XED = -1
• What does a perfectly price inelastic supply curve look like?


  A vertical supply curve
• What does a perfectly price elastic supply curve look like?


  A horizontal supply curve
• How does an inelastic supply curve appear compared to an elastic supply curve?


  An inelastic supply curve has a relatively steep incline, while an elastic supply curve has a relatively gentle slope
• What is the formula for calculating price elasticity of supply (PES)?


  PES = % change in quantity supplied / % change in price
• If the price increases by 10% and supply increases by 30%, what is the PES?


  PES = 3
• What are the key factors that determine the value of PED, YED, XED, and PES?


  • Availability of substitutes
  • Necessity vs luxury
  • Time period for adjustment
  • Proportion of income spent on the good
• What are the practice questions related to PED, YED, XED, and PES?


  1. PED practice calculation questions worksheet
  2. Calculate the price elasticity of demand for a price change
  3. Calculate the change in weekly sales revenue for chocolate bars
  4. Explain factors affecting price elasticity of supply for a hairdresser
  5. Cross elasticity of demand for mobile phones
• What are the types of elasticity discussed in the study material?

  • Price Elasticity of Demand (PED)
  • Income Elasticity of Demand (YED)
  • Cross Elasticity of Demand (XED)
  • Price Elasticity of Supply (PES)
• What is the significance of understanding elasticity in economics?


  • Helps firms set optimal pricing strategies
  • Affects consumer behavior and demand
  • Influences government policy decisions
  • Assists in predicting market trends
• What are the implications of elasticity for businesses?


  • Determines pricing strategies
  • Affects revenue and profit margins
  • Influences inventory management
  • Guides marketing strategies
• What are the implications of elasticity for consumers?


  • Affects purchasing decisions
  • Influences budget allocation
  • Impacts consumer welfare
  • Determines responsiveness to price changes