Hutchinson (2017) Principles of Microeconomics - Elasticity
5 important questions on Hutchinson (2017) Principles of Microeconomics - Elasticity
When you have calculated the elasticity, at which values do we speak of elasticity, inelasticity or unit elasticity?
- E>1: Elastic.
- E<1: Inelastic.
- E=1: Unit elastic.
Can you explain the midpoint formula and relate it to the calculation of elasticity?
Can you explain what XED is and how we can calculate it?
- XED stands for Cross Price Elasticity.
- Used to find out how much a change in the price of one good will change the demand for another related good.
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When you have calculated the XED, the related good can be two things.
Which two things are we talking about and which XED value do they have?
- Substitute.
- XED >=0 (positive value).
- Demand of product a increases when the price of product b goes up.
- E.g., Demand for Pepsi goes up when the price of Coca-Cola goes up.
- Complementary.
- XED > 0 (Negative value).
- Demand for product a decreases when the price of product c goes up.
- E.g., Demand for Pepsi goes down when the price for sugar goes up.
Which factor is the most important factor to determine elasticity of demand and which factor is the most important to determine elasticity of supply?
- Demand: Availability of Substitutes.
- High elasticity when there are many substitutes.
- E.g., The cola market is more elastic (Coca-cola, Pepsi, Freeway, etc.) than the market of oil (OPEC).
- Supply: Scale Up Costs.
- I.e., how quickly per unit costs increase with an increase in production.
- High elasticity when production can increase at low extra costs.
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