Principles of Microeconomics
ECON111
Page 115
1. Define the price elasticity of demand and the income elasticity of demand
Price elasticity of demand is a measure of how much quantity demanded of a good responds to a change in the price of that good. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Income elasticity of demand is a measure of how much quantity demanded of a good responds to a change in consumer’s income. It is calculated as the percentage change in quantity demanded divided by percentage change in income.
2. List and explain some of the determinants of the price elasticity of demand
Availability of close substitutes
Higher elastic demand - easier for consumers to switch from one good to the similar others
Necessities versus luxuries
Inelastic demand – Necessity
Elastic demand – luxury
Depends on the perception of consumer whether good is a necessity or luxury
Definition of the market
Depending on how we draw the boundaries of the market
Narrowly defined market
High elastic demand – easier to find close substitutes
Broadly defined market
Fairly inelastic demand – harder to find substitute due to broadness
Time horizon
Higher elastic demand over longer time horizons, over time, consumers are able to find other options and/or substitutes
3. If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals 0, is demand perfectly elastic or perfectly inelastic?
If elasticity is greater than 1, then demand is elastic.
If elasticity is 0, demand is perfectly inelastic and the demand curve is vertical.
4. On a supply-and-demand diagram, show total spending by consumers. How does this compare with total revenue received by producers?
When there is total spending by consumers, there is equal total revenue for producers.
5. If demand is elastic, how will an increase in price change total revenue? Explain.
Page 115
1. Define the price elasticity of demand and the income elasticity of demand
Price elasticity of demand is a measure of how much quantity demanded of a good responds to a change in the price of that good. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.
Income elasticity of demand is a measure of how much quantity demanded of a good responds to a change in consumer’s income. It is calculated as the percentage change in quantity demanded divided by percentage change in income.
2. List and explain some of the determinants of the price elasticity of demand
Availability of close substitutes
Higher elastic demand - easier for consumers to switch from one good to the similar others
Necessities versus luxuries
Inelastic demand – Necessity
Elastic demand – luxury
Depends on the perception of consumer whether good is a necessity or luxury
Definition of the market
Depending on how we draw the boundaries of the market
Narrowly defined market
High elastic demand – easier to find close substitutes
Broadly defined market
Fairly inelastic demand – harder to find substitute due to broadness
Time horizon
Higher elastic demand over longer time horizons, over time, consumers are able to find other options and/or substitutes
3. If the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals 0, is demand perfectly elastic or perfectly inelastic?
If elasticity is greater than 1, then demand is elastic.
If elasticity is 0, demand is perfectly inelastic and the demand curve is vertical.
4. On a supply-and-demand diagram, show total spending by consumers. How does this compare with total revenue received by producers?
When there is total spending by consumers, there is equal total revenue for producers.
5. If demand is elastic, how will an increase in price change total revenue? Explain.