Microeconomics: Supply and Demand Flashcards

Price elasticity of demand is defined as:

Answer: The percentage change in quantity demanded divided by the percentage change in price

Price elasticity of demand measures the responsiveness of quantity demanded to a price change, expressed as the ratio of percentage changes.

A good with many close substitutes available will tend to have:

Answer: Elastic demand

When close substitutes are available, consumers can easily switch to alternatives when price rises, making demand more elastic.

If a 10% increase in price leads to a 10% decrease in quantity demanded, the price elasticity of demand equals:

Answer: -1

Elasticity = % change in Qd / % change in P = -10% / 10% = -1, indicating unit elastic demand.

Along a linear downward-sloping demand curve, as you move from higher to lower prices:

Answer: Elasticity decreases (becomes more inelastic)

Along a linear demand curve, elasticity falls as you move to lower prices because the same absolute price change becomes a smaller percentage of a larger base quantity.

If demand for a good is perfectly inelastic, a tax placed on the good will be borne:

Answer: Entirely by consumers

With perfectly inelastic demand, consumers do not reduce quantity no matter the price, so they absorb the full tax burden.

Cross-price elasticity of demand between goods A and B is positive. This indicates that A and B are:

Answer: Substitutes

A positive cross-price elasticity means a price increase for B leads to an increase in demand for A, indicating the goods are substitutes.

Income elasticity of demand for a good equals -0.5. This means the good is:

Answer: An inferior good

Negative income elasticity of demand means demand falls when income rises, which is the definition of an inferior good.