Elasticity Basics: Definition, Calculation, Examples & Importance

📚 Quick Study Guide

• 📈 Elasticity: Measures the responsiveness of one variable to a change in another.
• ⚖️ Price Elasticity of Demand (PED): Measures how much the quantity demanded of a good changes when its price changes. Formula: $PED = \frac{\% \ Change \ in \ Quantity \ Demanded}{\% \ Change \ in \ Price}$
• 💰 Income Elasticity of Demand (YED): Measures how much the quantity demanded of a good changes when consumer income changes. Formula: $YED = \frac{\% \ Change \ in \ Quantity \ Demanded}{\% \ Change \ in \ Income}$
• cross 🛒 Cross-Price Elasticity of Demand (CPED): Measures how much the quantity demanded of one good changes when the price of another good changes. Formula: $CPED = \frac{\% \ Change \ in \ Quantity \ Demanded \ of \ Good \ A}{\% \ Change \ in \ Price \ of \ Good \ B}$
• 🏭 Price Elasticity of Supply (PES): Measures how much the quantity supplied of a good changes when its price changes. Formula: $PES = \frac{\% \ Change \ in \ Quantity \ Supplied}{\% \ Change \ in \ Price}$
• 🧮 Elastic Demand: PED > 1 (Quantity demanded is very responsive to price changes).
• 🧱 Inelastic Demand: PED < 1 (Quantity demanded is not very responsive to price changes).
• 🎯 Unit Elastic Demand: PED = 1 (Percentage change in quantity demanded equals the percentage change in price).

🧪 Practice Quiz

1. Which of the following best describes price elasticity of demand?
   1. A. The responsiveness of quantity supplied to a change in price.
   2. B. The responsiveness of quantity demanded to a change in income.
   3. C. The responsiveness of quantity demanded to a change in price.
   4. D. The responsiveness of price to a change in quantity demanded.
2. If the price of a product increases by 10% and the quantity demanded decreases by 5%, what type of demand is it?
   1. A. Elastic
   2. B. Inelastic
   3. C. Unit elastic
   4. D. Perfectly elastic
3. What does a cross-price elasticity of demand of 2 indicate between two goods?
   1. A. The goods are complements.
   2. B. The goods are substitutes.
   3. C. The goods are unrelated.
   4. D. The goods are inferior.
4. Which of the following has the most elastic demand?
   1. A. Gasoline
   2. B. Medicine
   3. C. Salt
   4. D. Luxury Sports Car
5. If the income elasticity of demand for a good is -0.5, what type of good is it?
   1. A. Normal good
   2. B. Luxury good
   3. C. Inferior good
   4. D. Necessity
6. A perfectly inelastic supply curve is:
   1. A. Horizontal
   2. B. Vertical
   3. C. Downward sloping
   4. D. Upward sloping
7. If the price elasticity of supply is 1.5, and the price increases by 2%, what is the percentage change in quantity supplied?
   1. A. 0.75%
   2. B. 1.33%
   3. C. 3%
   4. D. 3.5%