Elasticity |
Measure of how much buyers and sellers respond to changes in market conditions |
Price of Elasticity Demand (Ep) |
Measures how much quantity demanded responds to the change in price (how responsive consumers are when there is a price change) |
Price of Elasticity Demand Formula |
Ep = % change in quantity demanded / % change in price |
Percent change formula |
end value – start value / start value X100 |
Midpoint Method |
end value – start value / midpoint X100 |
If Price goes up and Quantity demanded goes down then…. |
negative price elasticity |
higher the Ep then….. |
more responsive (more elastic) |
if Ep > 1 then… |
its elastic |
If price goes down and no one buys the products then…. |
its inelastic if consumers buy then its elastic |
Elasticity Determinants |
-available substitutes (more options, more elastic) -def of a market (specific goods is more elastic, broad is inelastic) -time horizon (longer time, more elastic) -expensive (if higher price items drop in price, more elastic) |
Total Revenue formula |
Price X Quantity |
if demand is inelastic (a price elasticity less than 1), price and total revenue move in… |
the same direction: if the price increases, total revenue increases |
if demand in elastic (a price elasticity greater than 1) price and total revenue move in…. |
opposite directions: if the price increases, total revenue decreases |
if demand is unit elastic (a price elasticity exactly equal to 1) total revenue remains… |
constant when the price changes |
Income Elasticity of Demand (EI) |
measures how the quantity demanded changes as consumer income changes |
Income Elasticity of Demand Formula |
EI = % change in quantity demanded / % change in income |
Normal Goods |
higher income raises the quantity demanded (have positive income elasticities…. Ei >0) |
Inferior Goods |
higher income lowers the quantity demanded (have negative income elasticities….. Ei<0) |
Necessary Goods (food and clothing) |
tend to have small income elasticities because consumers choose to buy some of these goods even when their income is low ( 0<Ei<1) (inelastic) |
Luxury Goods (caviar and diamonds) |
tend to have large income elasticities because consumers feel that they can do without these goods altogether if their incomes are too low (Ei>1) (elastic) |
Cross-Price Elasticity of Demand (Exy) |
measures hoe the quantity demanded of one good responds to a change in price of another good |
Cross-Price Elasticity of Demand Formula |
Exy = % change in quantity demanded of good 1 / % change in price of good 2 |
If Exy > 0 ….. |
implies goods are substitutes (increase in price of good #2 increases the quantity of good #2) (move in same direction) |
If Exy < 0 ….. |
implies goods are compliments (increase in price of good #2 reduces the quantity of good #1) (move in opposite directions) |
Price elasticity of Supply (Es) |
measures how much quantity supplied responds to a change in price |
Price elasticity of Supply formula |
Es = % change in quantity supplied / % change in price |
if Es > 0 or Es = 0 then… |
Price and quantity are moving in the same direction |
Perfectly Inelastic |
curve is vertical (regardless of price quantity demanded/supplied stays the same) |
Perfectly Elastic |
curve is horizontal (very small changes in price lead to very large changes in quantity demanded/supplied) |
The price elasticity of demand measures |
buyers’ responsiveness to a change in the price of a good. |
When quantity demanded responds strongly to changes in price, demand is said to be |
elastic |
For a good that is a necessity, |
tends to be inelastic |
If a person only occasionally buys a cup of coffee, his demand for coffee is probably |
elastic |
The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because |
other flavors of ice cream are good substitutes for this particular flavor. |
There are very few, if any, good substitutes for motor oil. Therefore, |
the demand for motor oil would tend to be inelastic. |
Economists compute the price elasticity of demand as the |
percentage change in quantity demanded divided by the percentage change in price. |
Which of the following is not a determinant of the price elasticity of demand for a good? |
the steepness or flatness of the supply curve for the good |
The greater the price elasticity of demand, the |
greater the responsiveness of quantity demanded to a change in price. |
Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is |
1 (6 / 6) |
If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price results in a |
40 percent decrease in the quantity demanded (4.0 x 10) |
If the price elasticity of demand for a good is 0.94, then which of the following events is consistent with a 4 percent decrease in the quantity of the good demanded? |
3.760 percent increase in the price of the good (.94 x 4) |
Demand is elastic if elasticity is |
greater than 1 |
If the price decreased from $18 to $6, |
total revenue would increase by $1,200 and demand is elastic between points A and C. (18 x 100 = 1800) (6 x 500 = 3000) (3000 – 1800 = 1200) |
Demand is said to be inelastic if the |
quantity demanded changes proportionately less than price. |
A perfectly elastic demand implies that |
any rise in price above that represented by the demand curve will result in a quantity demanded of zero. |
In the case of perfectly inelastic demand, |
quantity demanded stays the same whenever price changes. |
Alice says that she would buy one banana split a day regardless of the price. If she is telling the truth, |
Alice’s demand for banana splits is perfectly inelastic. |
For which of the following goods would demand be most elastic? |
Tommy Hilfiger jeans |
An increase in price causes an increase in total revenue when |
demand is inelastic. |
If the demand for donuts is elastic, then a decrease in the price of donuts will |
increase total revenue of donut sellers. |
Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to increase his total revenue, he should |
decrease the price of his jewelry boxes. |
Total revenue |
remains unchanged as price increases when demand is unit elastic. |
Suppose that when the price of corn is $2 per bushel, farmers can sell 10 million bushels. When the price of corn is $3 per bushel, farmers can sell 8 million bushels. Which of the following statements is true? |
The demand for corn is price inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers |
Income elasticity of demand measures how |
the quantity demanded changes as consumer income changes |
You and your college roommate eat three packages of Ramen noodles each week. After graduation last month, both of you were hired at several times your college income. You still enjoy Ramen noodles very much and buy even more, but your roommate plans to buy fewer Ramen noodles in favor of foods she prefers more. When looking at income elasticity of demand for Ramen noodles, |
yours would be positive and your roommate’s would be negative |
Muriel’s income elasticity of demand for football tickets is 1.50. All else equal, this means that if her income increases by 20 percent, she will buy |
30 percent more football tickets. |
If two goods are substitutes, their cross-price elasticity will be |
positive |
The price elasticity of supply measures how much |
the quantity supplied responds to changes in the price of the good |
A key determinant of the price elasticity of supply is |
the ability of sellers to change the amount of the good they produce. |
In the long run, the quantity supplied of most goods |
can respond substantially to a change in price |
Technological advances in wheat production can lower farmers’ total revenue because the |
demand for wheat is inelastic |
If corn farmers know that the demand for corn is inelastic, and they want to increase their total revenue, they should all |
reduce the number of acres they plant in corn. |
Normal goods have negative income elasticities of demand, while inferior goods have positive income elasticities of demand |
False |
Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes. |
True |
If a supply curve is horizontal then supply is said to be perfectly elastic and the price elasticity of supply approaches infinity. |
True |
Economics- Chapter 5
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