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Percentage Change and Price Elasticity of Demand quiz #1 Flashcards

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Percentage Change and Price Elasticity of Demand quiz #1
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  • The price of one gallon of milk has increased from $3.24 to $4.05. What is the percentage increase in price?
    The percentage increase is calculated as (New Price - Original Price) / Original Price × 100%. So, ($4.05 - $3.24) / $3.24 × 100% = $0.81 / $3.24 × 100% ≈ 25%.
  • What does the price elasticity of demand measure?
    The price elasticity of demand measures how sensitive the quantity demanded of a good is to changes in its price, using percentage changes.
  • Which of the following statements about the price elasticity of demand is correct?
    Price elasticity of demand is always negative due to the inverse relationship between price and quantity demanded, but we use the absolute value for analysis. If elasticity is greater than 1, demand is elastic; if less than 1, demand is inelastic; if equal to 1, demand is unit elastic.
  • Why do economists use percentage changes instead of absolute changes when calculating elasticity?
    Percentage changes remove units, allowing for easier comparison across different products and markets regardless of their size or price level.
  • What is the shorthand symbol used for 'change' in elasticity formulas, and what does it represent?
    The Greek letter delta (Δ) is used as shorthand for 'change,' representing the difference between new and original values.
  • In the context of price elasticity of demand, what does an elasticity value less than 1 indicate?
    An elasticity value less than 1 indicates inelastic demand, meaning consumers are less sensitive to price changes and quantity demanded changes less than the price.
  • How does the direction of a price change affect the calculated price elasticity of demand using the percentage change formula?
    Using the original value as the denominator causes the calculated elasticity to differ depending on whether the price increases or decreases, even if the numerical changes are the same.
  • What adjustment is suggested to address the inconsistency in elasticity calculations when using the percentage change formula?
    It is suggested to use the average of the original and new values as the denominator to obtain a more consistent elasticity calculation.
  • When calculating percentage change in quantity demanded, what is the formula used?
    The formula is (New Quantity - Original Quantity) divided by Original Quantity.
  • What does it mean if the absolute value of price elasticity of demand equals 1?
    If the absolute value equals 1, demand is unit elastic, meaning the percentage change in quantity demanded is exactly equal to the percentage change in price.
  • When is demand considered inelastic in microeconomics?
    Demand is considered inelastic when the absolute value of the price elasticity of demand is less than 1, meaning that the percentage change in quantity demanded is less than the percentage change in price.
  • What does inelastic demand refer to in the context of price changes?
    Inelastic demand refers to a situation where a change in price leads to a relatively smaller change in quantity demanded, indicating that consumers are less sensitive to price changes.
  • How does elastic demand differ from inelastic demand?
    Elastic demand occurs when the absolute value of price elasticity of demand is greater than 1, meaning quantity demanded changes more than the price change. Inelastic demand occurs when the absolute value is less than 1, meaning quantity demanded changes less than the price change.
  • What is the general formula for calculating price elasticity of demand?
    The formula for price elasticity of demand is: Price Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Price).
  • What does price elasticity of demand measure in economics?
    Price elasticity of demand measures how sensitive the quantity demanded of a good is to changes in its price.
  • How does price elasticity of demand show the relationship between price and quantity demanded?
    Price elasticity of demand shows how much the quantity demanded of a good responds to a change in its price, indicating whether consumers are sensitive or insensitive to price changes.
  • Why is the absolute value used when interpreting price elasticity of demand?
    The absolute value is used because price elasticity of demand is always negative due to the inverse relationship between price and quantity demanded, and using the absolute value simplifies analysis by focusing on the magnitude of responsiveness.