Price Elasticity of Demand - AP Microeconomics

1. What happens to elasticity as more substitutes become available?

   Elasticity increases. More options make consumers more price-sensitive.

2. What does it mean if demand is elastic?

   Elastic demand means $|E_d| > 1$. Quantity changes more than proportionally to price.

3. What is perfectly inelastic demand?

   Quantity demanded does not change as price changes. Elasticity equals zero; vertical demand curve.

4. Identify the elasticity if $E_d = 1.5$.

   Demand is elastic. Since $|1.5| > 1$, demand responds strongly to price.

5. Calculate elasticity: Price increases 5%, quantity decreases 2%.

   $E_d = 0.4$ (inelastic). Calculated as $\frac{2\%}{5\%} = 0.4$.

6. How does necessity affect price elasticity?

   Necessities tend to have inelastic demand. People cannot easily reduce consumption of essentials.

7. What does a perfectly inelastic demand curve look like?

   It is vertical. Straight vertical line showing zero price responsiveness.

8. How does a broader definition of the market affect elasticity?

   It leads to more inelastic demand. Fewer substitutes within broader categories reduce responsiveness.

9. Find the effect on revenue if demand is unitary elastic and price changes.

   Revenue remains unchanged. Price and quantity effects exactly offset each other.

10. What does it mean if demand is unitary elastic?

    Unitary elastic demand means $|E_d| = 1$. Quantity changes proportionally to price change.

11. Define price elasticity of demand.

    The responsiveness of quantity demanded to a change in price. Measures how sensitive consumers are to price changes.

12. Is a good with many close substitutes likely to have elastic or inelastic demand?

    Elastic demand. Substitutes make consumers highly price-sensitive.

13. What does it mean if demand is inelastic?

    Inelastic demand means $|E_d| < 1$. Quantity changes less than proportionally to price.

14. What does a perfectly elastic demand curve look like?

    It is horizontal. Straight horizontal line showing infinite price responsiveness.

15. How does time horizon affect elasticity?

    Demand is more elastic over longer time horizons. More time allows consumers to find alternatives.

16. Name an example of a good with elastic demand.

    Luxury goods like high-end cars. Non-essential items with many substitutes available.

17. How does the proportion of income spent on a good affect elasticity?

    Higher proportion leads to more elastic demand. Larger budget share makes price changes more noticeable.

18. What is a determinant of price elasticity of demand?

    Availability of substitutes. More substitutes make demand more responsive to price.

19. What type of demand curve represents perfectly elastic demand?

    A horizontal demand curve. Any price change causes infinite quantity response.

20. What happens to total revenue when demand is inelastic and price increases?

    Total revenue increases. Higher price with inelastic demand boosts total revenue.

21. What type of demand curve represents perfectly inelastic demand?

    A vertical demand curve. Quantity stays constant regardless of price level.

22. Identify the elasticity if $E_d = 0.5$.

    Demand is inelastic. Since $|0.5| < 1$, demand responds weakly to price.

23. What is cross-price elasticity of demand?

    It measures the responsiveness of demand for one good to a price change in another. Shows how demand for good A responds to price of good B.

24. Calculate elasticity: $P_1 = 100$, $P_2 = 90$, $Q_1 = 50$, $Q_2 = 60$.

    $E_d = 2$ (elastic). Using midpoint method: $\frac{(60-50)/(110)}{(90-100)/(190)} = 2$.

25. Identify the elasticity if $E_d = 1$.

    Demand is unitary elastic. Since $|1| = 1$, equal proportional response.

26. What is the elasticity of a necessity likely to be?

    Inelastic. Essential goods typically have few substitutes.

27. Find the effect on revenue if demand is elastic and price increases.

    Revenue decreases. Higher price reduces quantity more than proportionally.

28. What happens to total revenue when demand is elastic and price decreases?

    Total revenue increases. Lower price with elastic demand boosts total revenue.

29. Calculate elasticity: $P_1 = 50$, $P_2 = 55$, $Q_1 = 200$, $Q_2 = 180$.

    $E_d = -1.11$ (elastic). Using midpoint method: $\frac{(180-200)/(380)}{(55-50)/(105)} = -1.11$.

30. State the midpoint formula for elasticity.

    $E_d = \frac{(Q_2 - Q_1)/(Q_2 + Q_1)}{(P_2 - P_1)/(P_2 + P_1)}$. Uses average values to avoid endpoint bias.

31. What is the elasticity of a luxury good likely to be?

    Elastic. Non-essential goods typically have many substitutes.

32. Calculate elasticity: Price decreases 10%, quantity increases 20%.

    $E_d = 2$ (elastic). Calculated as $\frac{20\%}{10\%} = 2$.

33. What is perfectly elastic demand?

    Quantity demanded is infinite at a specific price. Elasticity is infinite; horizontal demand curve.

34. Calculate elasticity: $P_1 = 200$, $P_2 = 220$, $Q_1 = 100$, $Q_2 = 95$.

    $E_d = -0.5$ (inelastic). Using midpoint method: $\frac{(95-100)/(195)}{(220-200)/(420)} = -0.5$.

35. Calculate elasticity: $\%$ change in price = 10%, $\%$ change in quantity = -10%.

    $E_d = -1$ (unitary elastic). Equal percentage changes in opposite directions.

36. Why is the price elasticity of demand usually negative?

    Due to the law of demand; price and quantity move in opposite directions. Price and quantity demanded move in opposite directions.

37. What is the formula for price elasticity of demand?

    $E_d = \frac{\%\, \text{change in quantity demanded}}{\%\, \text{change in price}}$. Standard formula showing percentage change relationship.

38. Name an example of a good with inelastic demand.

    Essential goods like insulin. Life-saving medicines with no close substitutes.

39. What is the relationship between elasticity and total revenue?

    Elasticity determines the direction of total revenue change. Elasticity predicts how revenue responds to price changes.

40. Find the effect on revenue if demand is inelastic and price decreases.

    Revenue decreases. Lower price increases quantity less than proportionally.

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