MicroeconomicsLesson 1 of 1 in the course Elasticity

Interpreting Elasticity Across Product, Labor, and Savings Markets

5 flashcards · 5 quiz questions · 5 match pairs · 5 fill-in sentences · English

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Summary

Elasticity measures how strongly one variable responds, in percentage terms, to a change in another variable. Demand responds to more than the good’s own price: income and the prices of related goods also matter. This lesson explains how economists measure those responses and interpret their signs.

Income elasticity of demand=% change in quantity demanded% change in income\text{Income elasticity of demand} = \frac{\%\text{ change in quantity demanded}}{\%\text{ change in income}}

All flashcards

What does income elasticity of demand measure?
It measures the percentage change in quantity demanded divided by the percentage change in income.
What is a normal good?
A good with positive income elasticity: when income rises, its quantity demanded tends to rise, shifting its demand curve right.
What is an inferior good?
A good with negative income elasticity: when income rises, consumers tend to demand less of it, shifting its demand curve left.
What does positive cross-price elasticity indicate?
It indicates that the goods are substitutes: a rise in the price of one tends to increase demand for the other.
What does negative cross-price elasticity indicate?
It indicates that the goods are complements: a rise in the price of one tends to reduce demand for the other.

Quiz questions

  1. If income rises by 4% and quantity demanded of a good rises by 8%, what is the good’s income elasticity of demand?Answer: 2
  2. If an elasticity has magnitude 0.5, what does that imply when the explanatory variable changes by 1%?Answer: The outcome changes by about 0.5%, in the direction indicated by the sign.
  3. In 2011, Netflix raised a combined service’s price from $10 to $16. Using the midpoint method, a forecasted loss of 600,000 subscribers from 24.6 million implied an estimated price elasticity near:Answer: -0.05
  4. Why can close substitutes make customers more likely to respond to a firm’s price increase?Answer: They can make customers more willing to switch after a price increase.
  5. In economics, what does an unqualified reference to “elasticity of demand” usually mean?Answer: Price elasticity of demand.

Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

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