Demand Supply Elasticity Ch 19 Study Guide

inelastic demand

A demand relationship in which a given percentage change in price will result in a less-than-proportionate percentage change in the quantity demanded.

unit elasticity of demand

A demand relationship in which the quantity demanded changes exactly in proportion to the change in price.

perfectly inelastic demand

A demand that exhibits zero responsiveness to price changes. No matter what the price is, the quantity demanded remains the same.

perfectly elastic demand

A demand that has the characteristic that even the slightest increase in price will lead to zero quantity demanded.

perfectly elastic supply

A supply characterized by a reduction in quantity supplied to zero when there is the slightest decrease in price.

perfectly inelastic supply

A supply for which quantity supplied remains constant, no matter what happens to price.

1. Price elasticity of demand measures responsiveness of a. quantity demanded to changes in price. b. quantity demanded to changes in income. c. price to changes in quantity demanded. d. price to changes in demand.

A: Quantity demanded to changes in price.

4. If price elasticity of demand is calculated using the original price and quantity, then over a given range in the demand curve price elasticity of demand a. differs, depending on whether price rises or falls. b. is the same, regardless of whether price rises or falls. c. is equal to 1. d. rises as price falls.

A: differs, depending on whether price rises or falls.

20. If price rises, the quantity supplied will be greater the a. longer the time that elapses b. more income elastic is the good c. higher the price elasticity of demand for the good d. all of the above

A: longer the time that elapses

11. If the cross price elasticity of demand between Goods A and B is positive, the goods are: a. substitutes b. complements c. unrelated d. necessities

A: substitutes

13. Digitals and downloadable apps are a. substitutes b. complements c. not related goods d. necessities

B: complements

2. If the price of elasticity of demand is 0.33, then a. demand is inelastic. b. demand is inelastic over that price range. c. demand is elastic. d. demand is elastic over that price range.

B: demand is inelastic over that price range.

7. If price falls and over that price range demand is inelastic, total revenues will a. remain constant b. fall c. unit elastic d. equal to 1

B: fall

14. When the income elasticity of demand for Good A is calculated, a. the price of Good A varies b. income changes, which lead to horizontal shifts in the demand curve for Good A, are measured c. a movement along the demand curve for Good A is measured d. all of the above

B: income changes, which lead to horizontal shifts in the demand curve for Good A, are measured

16. At current prices of a highly addictive drug, the demand for the drug is highly price a. elastic b. inelastic c. cross elastic d. unit elastic

B: inelastic

6. If price rises and total revenue rises, then the price elasticity of demand over that range is a. elastic b. inelastic c. unit elastic d. equal to 1

B: inelastic

9. If the demand for Good A is perfectly elastic, a. quantity demanded does not vary with price b. the demand curve is horizontal c. the demand curve is vertical d. the demand curve is positively sloped

B: the demand curve is horizontal

15. Analogy: a movement along a demand curve is to price elasticity of demand as a shift in the demand curve is to a. an increase in demand b. changes in taxes or subsidies c. income elasticity of demand d. substitutes and complements

C: income elasticity of demand

18. A perfectly inelastic supply curve a. shows great quantity supplied responsiveness to price changes b. is horizontal at the given price c. indicates zero quantity supplied responsiveness to price changes d. is a normal situation

C: indicates zero quantity supplied responsiveness to price changes

5. If price falls by 1% and quantity demanded rises by 2%, then the price elasticity of demand a. is inelastic over that range b. is 0.5 c. is elastic over that range d. cannot be calculated from this info

C: is elastic over that range

3. Which one of the following is NOT true concerning the price elasticity of demand? a. its sign is always negative, due to the law of demand. b. it is a unitless, dimensionless number. c. it equals the percentage change in price divided by the percentage change in quantity demanded. d. it measures the responsiveness of quantity demanded to changes in price.

C: it equals the percentage change in price divided by the percentage change in quantity demanded.

10. Which one of the following is NOT a determinant of the price elasticity of demand? a. existence and closeness of substitutes b. proportion of expenses on the good to the consumer's budget c. price elasticity of supply d. length of time allowed for adjustment to a price change

C: price elasticity of supply

12. If the cross price elasticity between Goods A and B is -10, then A and B are a. close substitutes b. near substitutes c. strongly complementary d. mildly complementary

C: strongly complementary

8. If the demand for Good A is perfectly inelastic at all prices, a. quantity demanded does not change as price changes b. the law of demand is violated c. the demand curve is vertical at the given quantity d. all of the above

D: all of the above

19. If the supply of Good B is perfectly elastic and price falls, quantity supplied will a. remain unchanged b. rise c. fall d. fall to zero

D: fall to zero

17. Which of the following goods is probably the most highly income elastic? a. salt b. food c. alcoholic bevs d. private education

D: private education

12. The less time people have to respond to a price change, the higher is the price elasticity.

False: Elasticity increases over time because substitutes become more readily available over time.

3. Price elasticity of demand deals with absolute, not relative, values.

False: It deals with relative values

9. The price elasticity of demand for Microsoft software is less than the price elasticity of demand for software.

False: It is greater, because there are more substitutes for Microsoft's software than for software in general.

10. If the demand for Good A is perfectly elastic, its demand curve is vertical at that price.

False: It is horizontal at that price.

5. If the price elasticity of demand is 3, then over the relevant price range demand is inelastic.

False: It is price elastic because the coefficient exceeds 1.

1. Price elasticity of demand measures the responsiveness of price to changes in quantity demanded.

False: It measures quantity demanded responsiveness to price changes.

7. If price falls and total revenues rise, then over that price range demand is inelastic.

False: It must have been elastic.

15. if supply is perfectly inelastic, the curve will be horizontal at the given quantity.

False: It will be vertical at the given quantity.

price elasticity of demand (Ep)

The percentage change in quantity demanded divided by the percentage change in price.

price elasticity of supply (Es)

The percentage change in quantity supplied divided by the percentage change in price.

income elasticity of demand (Ei)

The percentage change in the amount of a good demanded, holding its price constant, divided by the percentage change in income. The responsiveness of the amount of a good demanded to a change in income, holding the good's relative price constant.

11. If the demand for Good A is perfectly inelastic over all prices, Good A violates the law of demand.

True

13. If the cross price elasticity of demand for Goods A and B is negative, A and B are complements.

True

14. Income elasticity of demand is calculated for a horizontal shift in the demand curve, given price.

True

2. Because of the law of demand, price elasticity of demand will always (implicitly) be a negative number.

True

4. When price elasticity of demand is calculated by using the average value approach, price elasticity is the same whether price rises or falls over a given demand curve range.

True

6. When the demand for an item is perfectly elastic, the slightest increase in the price of that item causes the quantity demanded to drop to zero. As a result, the demand curve for the item is horizontal.

True

8. If the price elasticity of demand is 0.5 at the current price of an item, an increase in the price of an item will increase revenues.

True

elastic demand

a demand relationship in which a given percentage change in price will result in a larger percentage change in quantity demanded.

Cross price elasticity of demand (Exy)

the percentage change in the amount of an item demanded ( holding its price constant) divided by percentage change in the price of a related good.