Chapter 6: Elasticity

A price effect

After a price increase, each unit sold sells at a higher price, which tends to raise revenue.

A quantity effect

After a price increase, fewer units are sold, which tends to lower revenue.

Demand for a luxury item tends to be

more elastic

Over longer periods of time, demand tends to be

more elastic

Over longer periods of time, demand tends to become

more elastic

Demand for an item that uses a large portion of your budget tends to be

more elastic.

Paul owns a Tim Horton's, a famous donut and coffee franchise. He is willing to sell as many maple glazed donuts as customers want at a price of $1.00$1.00 each, but he refuses to sell any donuts for any price lower than $1.00$1.00. Supply is

perfectly elastic

Marcel Duchamp was a famous artist prior to his death, and was known for his Dada artwork, including works such as "Soft Toilet." All of his original sculptures and paintings go on sale. Supply is

perfectly inelastic

Perfectly elastic

the case in which any price increase will cause the quantity demanded to drop to zero; the demand curve is a horizontal line.

Perfectly elastic supply

the case in which even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite; the perfectly elastic supply curve is a horizontal line.

Income elastic

the case in which the income elasticity of demand for a good is greater than 1. Examples include luxury homes and international travel.

Income inelastic

the case in which the income elasticity of demand for a good is positive but less than 1. Examples include food and clothing.

Unit-elastic-demand

the case in which the price elasticity of demand is exactly 1.

Elastic

the case in which the price elasticity of demand is greater than 1.

Inelastic

the case in which the price elasticity of demand is less than 1.

% Change in price

(change in price/initial price) x 100

% Change in quantity demanded

(change in quantity demanded/initial quantity demanded) x 100

Blake eats two bags of generic potato chips each day. Blake's hourly wage increases from $9 to $15, and he decides to stop eating generic chips and instead eats a name-brand potato chip. Use the midpoint method to calculate Blake's income elasticity of demand for generic potato chips. Round your answer to two decimal places.

-4.00, inferior good. Any negative elasticity of demand means the good is inferior.

If a 25% price increase for Product A causes a 10% decrease in its quantity demanded, but no change in the quantity demanded for Product B, what is the cross-price elasticity of these goods? Round your answer to one decimal place.

0--no relationship

Price elasticity of demand with two points

Q2-Q1/(Q1+Q2)/2 / P2-P1/(P1+P2)/2

Midpoint method formula

% change in X = (change in X / average value of X) x 100 ; average value of x = (starting value of x + final value of x) / 2

Income elasticity of demand formula

% change in quantity demanded / % change in income

Price elasticity of demand

% change in quantity demands/ %change in price. A negative number, but economists tend to take the absolute value.

Price elasticity of supply formula

% change in quantity supplied / % change in price

Andrina always spends 20% of her income on thingamabobs. Assume that her income increases by some percentage while the price of thingamabobs remains constant (and that all thingamabobs cost the same). What is her income elasticity of demand for thingamabobs? HINT: To compute these elasticities, recall that if the price of thingamabobs is 𝑃𝑠 and 𝑄𝑠 is the quantity of thingamabobs consumed, then the total amount Adella spends on thingamabobs is𝑃𝑠×𝑄𝑠. Does Adella change how many she purchases if her income changes?

1

Each month, Evelyn spends exactly $50 on frappuccinos, regardless of the price. Evelyn's price elasticity of demand for frappuccinos is:

1

Last week, Michelle spent $30 on caviar. Today, Michelle still spends $30 on caviar even though its price has doubled. What is Michelle's price elasticity of demand for caviar?

1

Cross-price elasticity of demand formula

Calculated using a midpoint method: % change in quantity of A demanded / % change in price of B

The price elasticity of demand for snowboarding lessons at Jay Peak resort in Vermont is greater than 1. This means that the demand for snowboarding lessons is _____.

Elastic

Determine which statement about the absolute value of the price elasticity of demand is correct.

The price elasticity of demand for Gain laundry detergent is likely to be greater than the price elasticity of demand for laundry detergent in general.

Cross-price elasticity of demand

a measure of the effect of the change in the price of one good on the quantity demanded of the other; it is equal to the percent change in the quantity demanded of one good divided by the percent change in the price of another good. It can be negative or positive depending on whether the goods are complements or substitutes. Substitutes: positive; Complements: negative

Price elasticity of supply

a measure of the responsiveness of the quantity of a good supplied to the price of that good; the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve.

Midpoint method

a technique for calculating the percent change in which changes in a variable are compared with the average, or midpoint, of the starting and final values.

If the cross elasticity of demand between cheese and yogurt is positive, then:

cheese and yogurt are complements.

The price of matcha tea increases by 10%, and as a result, Cassandra purchases fewer biscotti. For Cassandra, matcha tea and biscotti are:

complements

Capital Metro decides to increase bus fare rates from $2.00$2.00 to $2.21$2.21. Consequently, the number of passengers who decide to take the bus in Austin drops from an average of 70,000 riders a day to an average of 61,000 riders a day.

elastic

It is very easy for Evelyn to find inexpensive inputs for her business. Evelyn's supply is therefore likely to be:

elastic

The price of facial tissues rises from $2.85$2.85 per box to $3.15$3.15. As a result, P&G increases production from 1515 million boxes to 2525 million boxes of facial tissue. Supply is

elastic

When Ruko, a device used to stream movies at home, increases prices by 48 percent, total revenue decreases by 69 percent.

elastic

If the income elasticity of electric cars is positive:

electric cars are a normal good.

A perfectly elastic supply curve is:

horizontal.

Bright Ideas increases its production of lightbulbs by 15%15% after a 400%400% increase in the price of fluorescent bulbs. Supply is

inelastic

Economists working for the United States have determined that the elasticity of demand for gasoline is 0.5.

inelastic

When Bluebox, a streaming service for foreign television shows and movies, increases its prices by 49 percent, total revenue increases by 28 percent.

inelastic

When there are fewer substitutes, demand tends to be

less elastic

With fewer substitutes, demand tends to be

less elastic

Perfectly inelastic supply

the case in which the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied; the perfectly inelastic supply curve is a vertical line.

Perfectly inelastic demand

the case in which the quantity demanded does not respond at all to changes in the price; the demand curve is a vertical line.

Income elasticity of demand

the percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income. When negative, it's an inferior good. When positive, it's a normal good.

Price elasticity of demand

the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve. How sensitive users or consumers are to changes in price.

Which factor does NOT determine the price elasticity of demand?

the slope of the supply curve

Total revenue

the total value of sales of a good or service (the price of the good or service multiplied by the quantity sold). The total revenue at any given price is equal to the area of a rectangle whose height is the price and whose width is the quantity demanded at that price.

Contain Yourself!, a plastic container company, raises the price of its signature Lunchbox container from $3.00$3.00 to $4.00$4.00. As a result, the quantity sold drops from 20,000 to 15,000.

unit elastic

When Cinema Supreme increases ticket prices by 26 percent, total revenue does not change.

unit elastic

With the school semester starting for both high school and college, Papermate chooses to increase production of pens from 3838 million to 4242 million after global prices of writing instruments increase from $1.90$1.90 a package to $2.10$2.10 a package. Supply is

unit elastic