10e_Essay_Test_Bank_Ch_6_FINAL

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1、Chapter6:DescribingSupplyandDemand:ElasticitiesEssayQuestions1.Definethepriceelasticityofdemandandthepriceelasticityofsupply.Whatisthedifferencebetweenelasticandinelasticdemand?Answer:Thepriceelasticityofdemandisameasureoftheresponsivenessofquantitydemandedtochangesinprice.

2、Specifically,thepriceelasticityofdemandisthepercentagechangeinquantitydemandeddividedbythepercentagechangeinprice.Thepriceelasticityofsupplyisameasureoftheresponsivenessofquantitysuppliedtochangesinprice.Specifically,thepriceelasticityofsupplyisthepercentagechangeinquantity

3、supplieddividedbythepercentagechangeinprice.Thedifferencebetweenelasticandinelasticdemandrelatestowhetherthepercentagechangeinquantityislargerorsmallerthanthepercentagechangeinprice.Specifically,demandiselasticifthepercentagechangeinquantityisgreaterthanthepercentagechangei

4、nprice.Demandisinelasticifthepercentagechangeinquantityislessthanthepercentagechangeinprice.2.Boththeslopeofthedemandcurveandtheelasticityofdemandaremeasuresofhowconsumersaltertheirquantitiesdemandedinresponsetochangesinprice.Howarethetwoconceptsdifferentfromeachother?Given

5、anegativelyslopedstraight-linedemandcurve,howwillslopeandelasticitydiffer?Givenaverticalorhorizontaldemandcurve,howwilltheydiffer?Answer:Theslopeofthedemandcurverelatesabsolutechangesinpriceandquantitydemanded.Elasticityisaratioofpercentagechanges.Whereastheslopeofthedemand

6、curvewilldependontheunitsinwhichpriceandquantityaremeasured,elasticityisapurenumberandisindependentoftheunitsinwhichpriceandquantityaremeasured.Ifthedemandcurveisastraightline,itsslopeisconstant.However,theelasticityofdemandalonganegativelyslopedstraight-linedemandcurvechan

7、gesateverypoint.Itincreasesaswemoveuponthedemandcurve(higherpricesandlowerquantities),anddecreasesaswemovedown(lowerpricesandhigherquantities).Finallyinmeasuringslope,thechangeinpriceisinthenumeratorandthechangeinquantityisinthedenominator.Inthecaseofelasticity,thepercentag

8、echangeinquantityisinthenumeratorandthepercentagechangeinpriceisinthedenominator.H