Economics, 3rd Edition

QUESTIONS FOR REVIEW

1 

Define the price elasticity of demand and the income 

elasticity of demand.

2 

List and explain some of the determinants of the price 

elasticity of demand. Think of some examples to use 

to illustrate the factors you cover.

3 

If the elasticity is greater than 1, is demand elastic 

or inelastic? If the elasticity equals 0, is demand 

perfectly elastic or perfectly inelastic?

4 

How is the price elasticity of supply calculated? 

Explain what this measures.

States would be reduced by at least 

a full percentage point – and much 

more if oil turns out to be more import-

ant than we thought. ‘Relative price 

changes of this magnitude would be 

unprecedented’, the authors note, 

‘and would almost certainly have non-

linear effects on GDP that the model is 

not able to capture adequately’. Yikes.

In any case, these scenarios 

aren’t easy to model – especially 

since nations might respond in 

unpredictable ways. (If crude output 

started shrivelling, some oil produ-

cers could start restricting exports. 

Or fuel subsidies could affect 

demand elasticity.) All told, however, 

the IMF authors say it’s quite pos-

sible that a decent-sized decline in 

oil production could have ‘dramatic’ 

effects that could prove very, very 

difficult for the world to adjust to.