Percentage Change and Price Elasticity of Demand quiz #1 Flashcards
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.