The Questions Macroeconomics / Microeconomics

The elasticity of demand measures the buyer’s reaction to price as its changing. “Economists measure the degree to which demand is price elastic or inelastic with the coefficient E d, defined as E d = percentage change in quantity demanded of product X/ percentage change in price of product X” (McConnell, C. 2011). Therefore, Ed=∆Qd/∆Pd. When elasticity of demand is measured less than one, demand is considered to be inelastic. The coefficient in an inelastic range is less than one. When this takes place the percentage change in price is more than the percentage change in quantity. It can be said that when inelastic demand is present that quantity becomes less effected by price changing.

2. Total revenue falls as the price of a good is raised, if the demand for the good is ( )

You are an economist advising Holden Australia about increasing their total revenue. How would knowledge of elasticity help you to make the correct decision?

b. EXPLAIN how the total revenue test can be used to determine if a demand curve is elastic or inelastic. Use two graphs with numerical examples in your response. ( ____/5)

c. quantity demanded of a taxed good in response to a change in the tax rate

When there is a large increase in the price of a product in the short run it results in inelastic demand because there is little time to adjust to the increase and find an alternative product. Let’s say the consumer uses the local bus service to go to work. On the way to work one day he notices that the prices of transportation will double beginning tomorrow. In the short time he may be forced to continue paying the higher prices until he can find alternative transportation. As time passes, the consumer can make alternative choices such as carpooling, working from home, or riding a bike to work; therefore, the cost increase for the transportation would be elastic.

The fact that price and quantity demanded are related negatively illustrates the a.law of supply.b.law of quantity supply.c.law of demand.d.law of quantity demanded.e.point that some facts are unobservable. ANS

C. Any gain or loss in the firm's revenue from increasing its price would depend on the price elasticity of demand: The more elastic the demand, the higher the revenue potential from a price increase.

For example, the tax incidences will change based on both the elasticity of demand and supply. The consumer has to

9. If the demand for a good is perfectly price inelastic in the short run and the supply curve is upward sloping, imposing a sales tax on the good will

b. Suppose the price for the ice cream is currently $5. Will this price result in a shortage or a surplus? How much is the shortage or surplus? What would you expect to happen to price?

Elasticity is a measure of the responsiveness of demand to changes in the price of a good or service. In the case of Steam Scot, when the price rises from 4 to 5, demand falls from 60,000 to 40,000 units. The original equilibrium market price of 4 pounds resulted in demand of 60,000 units and this generated revenue of 240,000 pounds. When the prices increased to 5 pounds the resulting demand is 40,000 units, and this generates total revenue of 200,000 pounds. When market price changes from 4 pounds to 5 pounds 40,000 pounds of revenue are lost in this indicates an elastic price elasticity of demand.

When the elasticity of demand is elastic, the change in quantity will be greater that the change in price. Hence, the total revenue will reduce with increasing prices and increase as prices decrease. However, if the business offers goods or services with inelastic price elasticity of demand, then the change in quantity demanded will be smaller than the change in price. Consequently, the total revenue, which is a product of the two will increase when

Describe what has occurred to change the demand for, or the supply of, the good or service, and market prices of those products or services

If the demand for companies output is inelastic then the change in price will have a smaller effect on change of quantity. Let’s say company will cut the price for 10 percent. This will cause the increase in demands for 5