Choose correct explanations of price elasticity select...

Choose correct explanations of price elasticity. (Select multiple answers if applicable) a) The price elasticity of supply is 0.5 and the price elasticity of demand is -0.5. If the price increases by 1% in response to the increase in demand, the total revenue increases more than 1%. b) The price elasticity of demand is lower as it is easier to find substitutes. c) The price elasticity of supply is lower as the cost of storage for the product is higher. d) When the price elasticity of demand is -1.2, an increase in the price raises the total revenue.

Transcript

00:01 So here we're talking about elasticity, right? and price elasticity measures the responsiveness in quantity with respect to the price, right? it's telling you if the price changes, like say, for example, if the price increases by 10%, but then the quantity goes down by 10%, you have an elasticity of minus one.

00:19 So it's giving you this measure of quantity's responses so the first ones that we can rule out are b and c, right? it says, and this is usually called epsilon.

00:31 So the epsilon of demand is lower and the epsilon of supply is lower.

00:38 These two are just wrong.

00:40 There are no blanket statements here.

00:44 It depends on the specific commodity, right? right.

00:50 In some commodities, you might imagine that the demand is very sensitive to price.

00:56 And for others, it's not just in some cases.

00:59 In some cases, the price goes up, a lot more will be supplied.

01:02 And in some cases, if the price goes up, there's no more to supply.

01:05 So it's all about the specific good or service.

01:08 You can't say anything in general about whether the price elasticity of supply or demand is higher or lower.

01:13 D is also pretty straightforward.

01:15 If the elasticity is minus 1 .2, that means the percentage change in quantity is greater than the percentage change in price.

01:24 So for example, this might be minus 12%, and this would be plus 10%.

01:29 If we think about revenue, revenue is price times quantity.

01:33 So here we have plus 10%, minus 12%.

01:36 So the sum of it is minus 2%.

01:39 So here, when the price goes up, the quantity goes down by more, and so the revenue goes down.

01:48 So this one is also false, right? these can't be right, and this one we can see by application of the elasticity formula that it's wrong.

01:57 So let's think about a...

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