Introduction to Economics 1 Dersi 4. Ünite Sorularla Öğrenelim

Define elasticity briefly.

Elasticity, in general, is used to quantify the response of one variable when another variable changes. 

What does the price elasticity of demand measure?

It measures the responsiveness of demand to changes in price.

Why is the sign of the price elasticity of
demand always negative?

It is always negative because of the law of demand.

Which one do you expect to have more elastic demand: the food market in general or the hamburger market in particular? Explain your reason. 

Goods with close substitutes tend to have more elastic demand than the goods that don’t have close substitutes. Since the food market is defined in broad sense, it does not have close substitutes compared to the hamburger market which has many close substitutes. Thus, we expect hamburger market to have more elastic demand than the food market.

When we can say that the demand is inelastic?

Demand is inelastic when the percentage change in quantity demanded is smaller than the percentage change in price. Inelastic demand always takes a value between zero and -1.

When we can say that the demand is elastic?

Demand is elastic when the percentage change (decrease) in quantity demanded is larger than the percentage change (increase) in price. Elastic demand has an absolute value greater than 1.

Explain the price elasticity of demand? Explain how is it related to the demand curve?

The price elasticity of demand measures how much quantity demanded of a good changes when there is a change in the price of the good. It measures the price sensitivity or responsiveness of consumers and it is calculated as the percentage change in quantity demanded divided by the percentage change in price. Generally, it is thought that the price elasticity of demand can be understood by simply looking at the slope of a demand curve. The flatter the demand curve, the higher the price elasticity and the steeper the demand curve, the lower the price elasticity of demand. It should be noticed that the slope of a demand curve is different from its price elasticity of demand.

Define the term total revenue.

Total revenue is computed as the price of a good times the quantity sold.

If the demand of a good is inelastic, what would be the pricing strategy to increase the total revenue from the sales?

When the demand is inelastic, an increase in price causes the total revenue to increase. With an inelastic demand curve, the reason why the total revenue increases with price increase is that the increase in price leads to a decrease in quantity demanded that is proportionally smaller. So, if the demand of a good is inelastic, the pricing strategy to increase the total revenue from the sales would be to increase the price of the good. As a result, the total revenue increases.

Explain what happens
to revenue when the seller increases the price
of his/her product?

Whether or not a price hike causes total revenue from sales to increase is determined by the price elasticity of demand. If the demand of the good that the seller sells is elastic, an increase in the price causes the total revenue to decrease. A decrease in price, in contrast, causes the total revenue to increase. On the other side, when the demand of the good is inelastic, an increase in price causes the total revenue to increase.

What does the income elasticity of demand measure?

It measures the responsiveness of demand to income  changes.

What does the cross-price elasticity of demand measure?

It measures how much the quantity demanded of one good responds to a change in the price of another good.

Define the term 'elasticity of supply'.

The price elasticity of supply is a measure of the response of quantity supplied of a good to a change in price.

When the demand for the good is inelastic and the supply is elastic, what happens to the producers’ revenue if the supply increases because of the technological improvements?

The equilibrium price falls and the equilibrium quantity goes up. Since there is a fall in price, the revenue from sales for the sellers goes down since the demand for their product is inelastic. Recall that when the demand of the good is inelastic, an increase in price causes the total revenue to increase but in contrast a decrease in price causes the total revenue to decrease. Result indicate that technological improvements in the agriculture sector for the goods with inelastic demand cause the farmers’ income to decrease.

Define the term 'price ceiling'.

Price ceiling is a legal maximum on the price at which a good or a service can be sold.

Explain the term 'price floor'. 

Price floor is a legal minimum on the price at which a good or service can be sold.

Define the term 'tax incidence'. 

Tax incidence is the study of who bears the burden of taxation. 

Discuss the following question. Who pays the burden of the payroll tax?

The workers bear the bulk of the burden of a payroll tax if the labor supply is relatively inelastic than the labor demand, and the firms bear the bulk of the burden of a payroll tax if the labor supply is relatively elastic than the labor demand. Labor demand is more elastic than the labor supply. Thus, it can be said that a tax burden goes more heavily on the side of the market that is less price elastic which is labor supply. So, labor pays more of the payroll tax than the employers.

Explain the consumer surplus.

Consumer surplus is the difference between the maximum amount a person is willing to pay for a good and the market price.

Define the term market efficiency.

Efficiency is the property of a resource allocation of maximizing the total surplus received by the society.