Economics- Chapter 5

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 &gt; 0 …..

implies goods are substitutes (increase in price of good #2 increases the quantity of good #2) (move in same direction)

If Exy &lt; 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 &gt; 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.
-the extent to which demand increases as additional buyers enter the market.
-how much more of a good consumers will demand when incomes rise.
-the movement along a supply curve when there is a change in demand.

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
-fluid
-elastic
-dynamic
-highly variable

elastic

For a good that is a necessity,
-quantity demanded tends to respond substantially to a change in price.
-demand tends to be inelastic.
-the law of demand often does not apply.
-All of the above are correct

tends to be inelastic

If a person only occasionally buys a cup of coffee, his demand for coffee is probably
-represented by a vertical or nearly-vertical demand curve.
-not easily represented by a demand schedule or demand curve.
-inelastic.
-elastic

elastic

The demand for Chocolate Chip Cookie Dough ice cream is likely quite elastic because
-ice cream must be eaten quickly.
-this particular flavor of ice cream is viewed as a necessity by many ice-cream lovers.
-the market is broadly defined.
-other flavors of ice cream are good substitutes for this particular flavor.

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.
-the demand for motor oil would tend to be elastic.
-the demand for motor oil would tend to respond strongly to changes in prices of other goods.
-the supply of motor oil would tend to respond strongly to changes in people’s tastes for large cars relative to their tastes for small cars.

the demand for motor oil would tend to be inelastic.

Economists compute the price elasticity of demand as the
-percentage change in price divided by the percentage change in quantity demanded.
-change in quantity demanded divided by the change in the price.
-percentage change in quantity demanded divided by the percentage change in price.
-percentage change in quantity demanded divided by the percentage change in income.

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 time horizon
-the steepness or flatness of the supply curve for the good
-the definition of the market for the good
-the availability of substitutes for the good

the steepness or flatness of the supply curve for the good

The greater the price elasticity of demand, the
-more likely the product is a necessity.
-smaller the responsiveness of quantity demanded to a change in price.
-greater the percentage change in price over the percentage change in quantity demanded.
-greater the responsiveness of quantity demanded to a change in price.

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
-0
-1
-6
-36

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
-0.4 percent decrease in the quantity demanded
-2.5 percent decrease in the quantity demanded
-4 percent decrease in the quantity demanded
-40 percent decrease in the quantity demanded

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?
-.235 percent increase in the price of the good
-2.350 percent increase in the price of the good
-3.760 percent increase in the price of the good
-4.255 percent increase in the price of the good

3.760 percent increase in the price of the good (.94 x 4)

Demand is elastic if elasticity is
-less than 1
-equal to 1
-equal to 0
-greater than 1

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.
-total revenue would increase by $800 and demand is elastic between points A and C
-total revenue would decrease by $1,200 and demand is inelastic between points A and C.
-total revenue would decrease by $800 and demand is inelastic between points A and C.

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 more than price.
-price changes proportionately more than income.
-quantity demanded changes proportionately less than price.
-quantity demanded changes proportionately the same as price.

quantity demanded changes proportionately less than price.

A perfectly elastic demand implies that
-buyers will not respond to any change in price.
-any rise in price above that represented by the demand curve will result in a quantity demanded of zero.
-quantity demanded and price change by the same percent as we move along the demand curve.
-price will rise by an infinite amount when there is a change in quantity demanded.

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,
-the change in quantity demanded equals the change in price.
-the percentage change in quantity demanded equals the percentage change in price.
-infinitely-large changes in quantity demanded result from very small changes in the price.
-quantity demanded stays the same whenever price changes.

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.
-Alice’s price elasticity of demand for banana splits is 1.
-Alice’s income elasticity of demand for banana splits is 0.
-None of the above answers is correct.

Alice’s demand for banana splits is perfectly inelastic.

For which of the following goods would demand be most elastic?
-clothing
-blue jeans
-Tommy Hilfiger jeans
-All three would have the same elasticity of demand since they are all related.

Tommy Hilfiger jeans

An increase in price causes an increase in total revenue when
-demand is elastic.
-demand is inelastic.
-demand is unit elastic.
-All of the above are possible.

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.
-decrease total revenue of donut sellers.
-not change total revenue of donut sellers.
-There is not enough information to answer this question

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
-increase the price of his jewelry boxes.
-decrease the price of his jewelry boxes.
-not change the price of his jewelry boxes.
-None of the above answers is correct.

decrease the price of his jewelry boxes.

Total revenue
-always increases as price increases.
-increases as price increases, as long as demand is elastic.
-decreases as price increases, as long as demand is inelastic.
-remains unchanged as price increases when demand is unit elastic.

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 income inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
-The demand for corn is income elastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
-The demand for corn is price inelastic, and so an increase in the price of corn will increase the total revenue of corn farmers.
-The demand for corn is price elastic, and so an increase in the price of corn will increase the total revenue of corn farmers.

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.
-consumer purchasing power is affected by a change in the price of a good.
-the price of a good is affected when there is a change in consumer income.
-many units of a good a consumer can buy given a certain income level

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 negative and your roommate’s would be positive.
-yours would be positive and your roommate’s would be negative.
-yours would be zero and your roommate’s would approach infinity.
-yours would approach infinity and your roommate’s would be zero.

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
-150 percent more football tickets.
-50 percent more football tickets.
-30 percent more football tickets.
-20 percent more football tickets.

30 percent more football tickets.

If two goods are substitutes, their cross-price elasticity will be
-positive.
-negative.
-zero.
-equal to the difference between the income elasticities of demand for the two goods.

positive

The price elasticity of supply measures how much
-the quantity supplied responds to changes in input prices.
-the quantity supplied responds to changes in the price of the good.
-the price of the good responds to changes in supply.
-sellers respond to changes in technology.

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 price of the good they produce.
-the ability of sellers to change the amount of the good they produce.
-how responsive buyers are to changes in sellers’ prices.
-the slope of the demand curve.

the ability of sellers to change the amount of the good they produce.

In the long run, the quantity supplied of most goods
-will increase in almost all cases, regardless of what happens to price.
-cannot respond at all to a change in price.
-can respond to a change in price, but the change is almost always inconsequential.
-can respond substantially to a change in price.

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.
-demand for wheat is elastic.
-supply of wheat is elastic.
-supply of wheat is inelastic.

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
-plant more corn so that they would be able to sell more each year.
-increase spending on fertilizer in an attempt to produce more corn on the acres they farm.
-reduce the number of acres they plant in corn.
-contribute to a fund that promotes technological advances in corn production

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
-True
-False

False

Cross-price elasticity of demand measures how the quantity demanded of one good changes as the price of another good changes.
-True
-False

True

If a supply curve is horizontal then supply is said to be perfectly elastic and the price elasticity of supply approaches infinity.
-True
-False

True