ELASTICITY : PART ONE

RELATED CONCEPTS :|PRICE ELASTICITY OF DEMAND |ELASTIC, INELASTIC, UNIT ELASTIC |TOTAL REVENUE |INCOME ELASTICITY OF DEMAND |NORMAL GOODS, INFERIOR GOODS |CROSS ELASTICITY OF DEMAND |SUBSTITUTES |COMPLEMENTS |PRICE ELASTICITY OF SUPPLY |

When economists say that the price elasticity of demand for bananas is 2.0, what do they mean?

• They mean that the quantity demanded will increase 2% for every 1% decrease in price.

If consumers of a good are very sensitive to its price, is the good’s demand elastic or inelastic?

• Elastic.

If the output demanded is the same regardless of the price, what is the price elasticity of demand?

• It is perfectly inelastic.

If one demand curve has a steeper slope than another, is the steeper demand curve more inelastic?

• You cannot tell unless the two curves cross. At the crossing point, the steeper curve is the more inelastic.

What is the main factor that increases the elasticity of demand for a good?

• The greater availability of substitutes.

When will total revenue go up in the price is reduced?

• When the good’s demand is elastic.

If the income elasticity of demand for a good is greater than 1, what will happen to the demand for the good and to the good’s share of people’s income when income goes up?

• As income goes up, the quantity demanded will go up and the good’s share in income will go up.

How can one tell if two goods are substitutes? Complements?

• Two goods are substitutes if when the price of one goes up, the demand for the other also goes up. Two goods are complements if when the price of one goes up, the demand for the other goes down.

Will firms produce where total revenues are highest?

• No. Firms will produce where profits are highest.

If the demand for a good goes up, what will be the immediate supply response? The longer-term supply response?

• The immediate supply response will be a small increase in supply (or perhaps no increase). But given time, suppliers will increase the quantity supplied.

Copyright 2008 by Sujanto Rusli
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