Discussion Questions

1. Explain briefly why an increase in the price of an item with an elastic demand will reduce total revenue, while a fall in its price will increase total revenue.

2. Other things being equal, a fall in price will increase quantity demanded. Therefore, a seller can always increase total revenue by charging lower prices. Discuss.

3. What are the major factors that affect the degree of price elasticity of demand?

4. Explain why you would expect the demand for an item to be more elastic in the long run than in the short run

5. What is cross-price elasticity of demand? How does it differ from own price elasticity of demand?

6. What is income elasticity of demand?

7. Define elasticity of supply.

8. What does the coefficient of elasticity of supply measure?

9. What is the shape of the supply curve of a product with an elastic supply? With an inelastic supply?

10. What are the main factors that affect the degree of price elasticity of supply?

In-Class Assignment-5-Chapter-5-Elasticity Chapter Summary Total revenue is price multiplied by quantity. If the demand for an item is elastic, an increase in price of 5% will cause quantity demanded to fall by more than 5%, thus reducing total revenue. On the other hand, a 5% fall in price will cause quantity demanded to increase by more than 5% thus increasing total revenue. An increase in quantity demanded does not always imply an increase in total revenue. To emphasize this point, consider what will happen to total revenue if price falls to zero. The major factors affecting the degree of price elasticity of demand are the number and closeness of substitutes, the number of uses the item has the importance of the item in the budget, whether the item is considered a necessity or a luxury, and the time period being considered Demand would be more elastic in the long run because buyers have more time to adjust to the price change in the long run. Cross-price elasticity of demand is the degree of responsiveness in quantity demanded of one good or service to a change in the price of a related good or service. This differs from own price elasticity in that in own price elasticity the change agent is the price of the good or service being considered. Page-2: In-Class Assignment-5 Income elasticity of demand measures the percentage change in quantity demanded as a result of a change in income. Elasticity of supply is the extent to which quantity supplied will change as a result of a change in price. The coefficient of elasticity of supply measures the degree of responsiveness of quantity supplied to a change in price. The supply curve of a product with an elastic supply is relatively flat and cuts the vertical (price) axis. The supply curve of a product with an inelastic supply is relatively steep and cuts the horizontal (quantity) a ) axis. The main factors affecting the degree of price elasticity of supply are the time period under consideration, the cost of storage and how perishable the item is the number of production substitutes and production complements, and the cost of increasing output