ECON 202: Module 2
The state of Texas recently saw a gasoline price increase of 5%, which brought about a fall in the quantity of gasoline purchased of 1%. The price elasticity of demand is equal to _____, and demand is described as _____.
0.2; inelastic
Jane goes to an all-you-can-eat restaurant and makes three trips to the buffet. After finishing food from her third trip, she feels sick and throws up. Which of these economic explanations BEST matches Jane's situation?
Jane's marginal benefit from eating the 3rd plate was (-) negative
Demand Elasticity Factor 1
More competing products mean greater elasticity -- the more competing products there are, the more likely you are to find a close sub
Demand Elasticity Factor 3
Necessities have less elastic demand -- things that you really can NOT do w/o are things that you will keep buying even as the price rises
Which statement best characterizes the relationship between the elasticity of demand, price, and total revenue?
When demand is elastic and price falls, total revenue rises.
After North Carolina State University raised its tuition by 12%, a survey was conducted to determine how many students would transfer to another university as a result. Only about 1 in 300 students indicated they would transfer. Based on this information, the price elasticity of demand for education at this university is:
highly inelastic
Price Elasticity of Demand (ep)
how responsive is the quantity demanded to a change in price
If the price of airline tickets rises, there will be a(n):
increase in the demand for both bus and train tickets
Tesla cars become less expensive, what will happen in the market for other electric cars?
the demand for other electric cars will fall
Demand curves slope downward due to:
the law of demand
Revenue
the total amount of funds that seller receives from selling its good or services -- Price (per good) x Quantity
The price elasticity of demand for gasoline tends to be rather inelastic as:
there are few or no available subs.
Market demand curves obey the _______ __ ___________ which is the...
total quantity demanded is higher when the price is lower and vic versa
Suppose the price elasticity of demand for lemons is 1.8. If a fall frost destroys one-third of the nation's lemon crop, how will that affect total revenue from lemons, all other things equal?
total revenue will fall
Two products have a cross-price elasticity of demand of 1.5. Based on this value of cross-price elasticity, which products are they most likely to be?
two competing brands of soft drinks
Shifts in market demand curve can result from a change in the:
type and number of buyers
An increase in the price of an item will cause the movement
up the demand curve
Demand curve shows
willingness to pay for a given quantity
Income Elasticity of Demand
% change in quantity % change in income - (+) IPE (>0): the higher income, the more of the good is consumed (normal good) AND if IPE is (+) & (>1): it's a luxury good - (-) IPE (<0): means it's an inferior good
Formula for elasticity of demand
% change in quantity demanded ED = % change in price
A demand curve is a plan for how to respond to:
- different prices & if buyers' plans have NOT shifted, then the market demand curve has NOT shifted
Demand Elasticity Factor 2
Specific brands tend to have more elastic demand than categories of goods -- specific brands tend to have more close subs., demand for these goods is typically more elastic then demand for broad categories of goods
a. When Ruko, a device used to stream movies at home, increases prices by 42 percent, total revenue decreases by 57percent. b. When Cinema Supreme increases ticket prices by 26 percent, total revenue does not change. c. When Bluebox, a streaming service for foreign television shows and movies, increases its prices by 41 percent, total revenue increases by 22 percent.
a. elastic b. unit elastic c. inelastic
a. Roses on Valentines Day b. Health care c. Lay's potato chips d. Electricity e. Apple iPads f. Milk
a. inelastic b. inelastic c. elastic d. inelastic e. elastic f. inelastic
a. cosmetic surgery is _________ emergency surgery b. food @ 7pm @ a 24hr restaurant is _________ food @ 2pm @ a 24 hr restaurant c. electricity consumption this month __________ electricity consumption in a year d. all cars _________ red cars e. the Wall Street Journal __________ Wall Street Journal at the airport
a. more elastic than b. more elastic than c. less elastic than d. less elastic than e. more elastic than
1. Changes in Income
all of your individual choices are interdependent since you only have a limited amount of income to spend Shifts curve R - normal goods = if your income increases so the demand for normal goods increase as well Shifts curve L - inferior goods = as income increases; demand for inferior goods decreases (@ every price ppl want fewer bc they're switching to some higher quality product
A downward-sloping demand curve implies:
an inverse relationship btwn price and quantity demanded
A decrease in the price of an item will cause the movement
down the demand curve
Which of these scenarios does NOT illustrate the law of demand? - When Kit-Kats are cheaper, Mary opts to buy more Kit-Kats. - Darren buys two pairs of jeans when they are $40 each but only one pair when it is $60. - Layla buys less tea when the price of tea rises. - Freya buys more doughnuts when the price of doughnuts rises.
Freya buys more doughnuts when the price of doughnuts rises.
The price elasticity of demand along a linear demand curve:
increases in absolute value as the price rises
Milk is an inexpensive good that most would consider a necessity. You would therefore expect its demand to be:
inelastic
The price elasticity of demand for canned fruit is calculated as 0.75. Given this, demand is:
inelastic
When the percentage change in price is greater than the percentage change in quantity demanded, demand is said to be:
inelastic
and if the (ep) does NOT change by that much, it's:
inelastic (price changes by a lot as a % but the quantity did NOT change very as a % -- inelastic DC = steep
If demand is _____, a higher price yields _____ total revenue.
inelastic; higher
Diminishing marginal benefit:
is seen in the downward slope of a demand curve
In general, the long-run price elasticity of demand for a good tends to be _____ the short-run price elasticity of demand for it.
larger than
The relationship btwn price expectations and current demand is:
positive; when future prices are expected to rise, current demand rises
Can cause movement along a fixed demand curve
price changes bc demand curve summarizes the ENTIRE relationship btwn price & quantity demanded
Suppose the price of cupcakes decreases by 5%, and the quantity of cupcakes demanded increases by 15%. Demand for cupcakes is:
price elastic
Which of these scenarios depicts a rational buyer? - Mary values a bag of salad at $2, but she buys the bag of salad even when the price is $4. - John walks into a grocery store and purchases monthly groceries without paying attention to the prices of groceries. - Darwin buys a can of shoe polish at $4.50 when his marginal benefit from it is $3.75. - Damien buys a sandwich for $5 when the marginal benefit of the sandwich to him is $7.
- Damien buys a sandwich for $5 when the marginal benefit of the sandwich to him is $7.
An increase in income = A decrease in income =
- demand for normal goods increases; inferior goods decrease - demand for normal goods decreases; inferior goods increases
After a while, Angela gets sick of eating the bitter chocolate and decides to cut back on dark chocolate and enjoy white chocolate more. What happens as a result of Angela's decision?
- her individual demand for dark chocolate decreases - the market demand for dark chocolate will decrease - her individual demand for white chocolate increases
Shift vs. Movements Along DC
- when price changes --> movement along DC - when other factors change --> shift of DC
The price elasticity of demand for an item is impacted by:
- whether or not the item is a necessity - the time available to adjust to price changes - the number of available subs
If income rises by 20% and the quantity demanded of an item falls by 20%, the income elasticity of demand for this item is:
-1
The price of product A falls by 50%. As a result, the quantity demanded of product B rises by 50%. The cross-price elasticity of demand between product A and product B is _____, and they are _____.
-1; complements
Determinants of Elasticity
1) Availability of Substitutes - if there are a lot of other things you could easily buy instead of certain product, then small changes in price will affect the amount demanded a lot 2) Definition of Market - similar to substitutes 3) Need - the more a good is a necessity, the more inelastic its demand will be 4) Share of Budget - the demand for a good is generally more elastic the larger a share of the consumers budget it takes up 5.) Adjustment Time - the longer the time horizon, the more elastic demand is
The price elasticity of demand reflects the availability of subs. It is larger:
1.) When there are more competing products 2.) For specific brands rather than broad categories 3.) For things that aren't necessities 4.) When consumers search more 5.) When there's more time to adjust
5 Factors of Change in Demand
1.) changes in income 2.) changes in preference 3.) changes in related goods 4.) changes in the size of market 5.) changes in expectations about the future
4 Step Recipe to Finding Market Demand Curve
1.) survey customers = ask ea. person the quantity they will buy @ ea. price 2.) For ea. price, add (+) up the total quantity demanded by your customers (NOT the price ea. individual pays @ ea. quantity 3.) scale up the quantities demanded by the survey respondents so that they represent the whole market 4.) plot the total quantity demanded by the market @ea. price to draw the curve
Jonathan's income falls by 15%. He decides to cut down his purchases of restaurant meals by 20%. His income elasticity of demand for restaurant meals is:
1.33
A Smoothie King manager has estimated that the price elasticity of demand for exotic fruit smoothies is 2. If the store increases menu prices by 5%, she can expect the quantity of exotic fruit smoothies sold to decrease by _____ and total revenue to _____.
10%; fall
If the price of a movie is $15 and the quality demanded is 169, how many movies would be demanded if the price increased to $17? - 177 - 185 - 157 - 169
157
Delilah's income rises by 8%. She decides to increase the number of comic books she purchases by 20%. Her income elasticity of demand for comic books is:
2.5
If the price elasticity of demand for air travel is 4:
A 20% decrease in the price of air travel will INCREASE quantity demanded by 80%
Suppose after an early‑season hurricane destroys the grapefruit harvest in Texas, prices increase by 15%. As a result, the quantity demanded decreases by 16%. Calculate the absolute value of the elasticity of demand to two decimal places.
ED= 1.06
3.) Changes in Price of Related Goods
Complementary Goods: when the higher price of one good decreases your demand for another good OR the lower price of one good increases your demand for another good Substitute Goods: these goods can replace another identical good - demand for a good will increase if the price of a substitute good rises , & it will fall if the price of a substitute good falls Shifts curve to R substitutes become MORE expensive/complements get cheaper Shifts curve to L substitutes become CHEAPER/complements get expensive
Demand Elasticity Factor 4
Consumer search makes demand more elastic -- when consumers are willing to search a lot for a low-cost alternative for something, demand for that product is more elastic -- the more you search for a good deal, the more likely you are to find an acceptable, lower-priced sub. -- demand for storable goods tends to be much more elastic than perishable goods
Change in demand causes
ENTIRE curve to move either left or right
Perfectly Inelastic Demand
DC is (^|) vertical, (ep) is 0 -- no matter what the change in price, the total quantity demanded is unchanged
Perfectly Elastic Demand
DC is <--------->, (ep) is infinite -- any change in price leads to an infinite change in quantity demanded
Demand Elasticity Factor 5
Demand gets more elastic over time -- as time passes, you will find more options; more subs. become available MORE subs = MORE elastic demand
People buy more of a good when the price falls. There are several theoretical explanations for this behavior. Match the explanation for why people buy more at lower prices with the proper term (substitution, income, or total effect) - an increase in quantity demands that are attributable to changes in purchasing power as the price of a good falls - an increase in quantity demands attributable to the combination of the income and substitution effect - an increase in quantity demands that comes from consumers having a greater incentive to buy a good whose price is relatively lower
SUBSTITUTION EFFECT - an increase in quantity demands that comes from consumers having a greater incentive to buy a good whose price is relatively lower INCOME EFFECT - an increase in quantity demands that are attributable to changes in purchasing power as the price of a good falls TOTAL EFFECT - an increase in quantity demands attributable to the combination of the income and substitution effect
If the price per avocado increases from $1.50 to $1.75, this causes a decrease of the quantity demand along the demand curve, so what is the DC?
The demand curve is inelastic, and thus the seller gains revenue by raising price from $1.50 to $1.75.
ou are the manager of Frito-Lay's Cheese Puffs account, and you notice that when the price of Cheetos increases, there is an increase in demand for Cheese Puffs. What is the economic relationship between these goods that explains this behavior?
The increase in the price of Cheetos causes an increase in the demand for cheese puffs; therefore, these goods are substitutes
In a market economy, there is ________________ relationship btwn the price of a good and the amount of a good that buyers are willing and able to purchase
an inverse or negative
If the price of a good increases by 15%, and quantity demanded changes by 5%, then the price elasticity of demand is equal to:
approximately 0.33
The law of demand says that
as the price of a good increases, buyers are willing and able to purchase less
If an increase in the price of coconut oil brings about an increase in total revenue, then the percent rise in price is _____ in magnitude than the percent decline in quantity demanded.
larger
The demand curve for one particular brand of cough syrup will _____ the demand curve for cough syrup as a general category.
be more elastic than
5.) Changes in Expectations About the Future
changes in demographics, characteristics of population Shifts curve to R HIGHER future prices/plans Shifts curve to L LOWER future prices/plans
2.) Changes in Preferences
changes in your preference can change demand curve (DC) -- social pressures = shift DC Shifts curve to R MORE desire for certain item Shifts curve to L LESS desire for certain item
The movement of the demand curve shifting to the left shows a
decrease in demand
he law of demand says that, holding everything else constant, when the price of a good increases, the amount buyers buy will decrease, and when the price of a good decreases, the amount buyers buy will increase. To hold everything else constant means to use the ceteris paribus condition. If we change one of these things we were holding constant, which is the most likely result?
demand for the good will either increase or decrease
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
When (ep) is greater than 1 in absolute value, it's:
elastic (it stretches a lot for a certain amount of force) -- quantity is very responsive to price = it's stretchy (elastic) -- elastic DC = flat
If demand is _____, a higher price yields _____ total revenue.
elastic; lower
Demand for soft drinks outside an airport is more elastic than inside of the airport because:
fewer choices mean more inelastic demand
An inferior good is a good:
for which demand decreases when income rises
The buyers of a good will want to purchase it as long as their willingness to pay for the good is
greater than or equal to the price
Cross-Price Elasticity
measures how responsive the quantity demanded of one good is to price changes of another % change in quantity of 1 good(x) % change in price for diff. good (y) - (+) CPE (>0): means the 2 goods are subs. - (-) CPE (<0): means the 2 goods are complements
Change in quantity demanded causes
movement ALONG the curve
A change in price causes a _______________________, yielding a ________________.
movement along the demand curve; change in the quantity demanded
If the price of emergency visits to the dentist rose, we would expect:
only a slight decline the # of emergency visits to the dentist
Market Demand Curve
plots the total quantity of a good demanded by the market - across all potential buyers - @ ea. price
4.) Changes in the Size of Market
population increases = more ppl buying product @ every price Shifts curve to R INCREASE in market (population) size Shifts curve to L DECREASE in market (population) size
Income elasticity of demand measures how responsive the:
quantity demanded of a good is to changes in income
An individual demand curve is a graph that plots the:
quantity of an item that someone plans to buy @ ea. price
If a certain item has many substitutes, its demand curve will be:
relatively flat
If an item is a necessity rather than a luxury, its demand curve will be:
relatively steep
Taking the absolute value of the cross-price elasticity of demand is incorrect because it would:
remove the ability to tell whether the two products are substitutes or complements.
Your university hopes to raise more revenue by increasing student housing fees. This plan will work only if the percent:
rise in price is larger in magnitude than the percent decline in quantity demanded.
Consumer surplus
the difference btwn the maximum price a consumer is willing to pay for a particular quantity and the market price -- the feeling you get when you feel like you've gotten a really good deal
Demand is best described as
the quality of a good or a service that ppl are willing and able to purchase @ different possible prices
Suppose the percent change in the quantity demanded for water for any price change is zero. The demand curve for water is _____, and the price elasticity of demand is perfectly _____.
vertical; inelastic
Market Demand
what the market wants - the sum of the quantity demanded by ea. person - the purchasing decisions of all buyers taken as a whole