ECON Inquizitive Ch. 4
Match the price elasticity of supply to the product it describes.
candy bars ~relatively elastic [Candy is easy to produce and distribute, so if the price increases, the quantity supplied can respond and more will be supplied to the market relatively quickly] Christmas trees ~relatively inelastic [Christmas trees take years to grow and cannot easily be reproduced in the immediate and short run. Therefore, changes in price have only moderate effects on the number of trees supplied to the market] 1987 Volkswagen Beetles ~perfectly inelastic [It is not possible to make any more cars from 1987. Therefore, no matter how high (or low) the price becomes, the overall supply remains the same] *[Elasticity of supply is a matter of how readily a change in price leads to a change in quantity supplied]
Determine the price elasticity of demand for a microwave that experienced a 20% drop in price and a 50% increase in weekly quantity demanded.
~-2.5 [Demand for the microwave is elastic] *[50%/-20%=-2.5]
Use the midpoint method to calculate the price elasticity of demand for potato chips that increased in price from $2.00 to $3.00. The quantity demanded decreased from 100 bags a week to 50 bags a week at the local grocery store. Round to one decimal place.
~-1.7 [Demand for the potato chips is elastic. ED equals change in Q divided by average value of Q Over change in P divided by average value of P ED=change in Q ÷ average value of Q/change in P ÷ average value of P]
Use the midpoint method to calculate the price elasticity of supply for tablet computers, using the following information: Q1 = 10, P1 = 100 Q2 = 30, P2 = 150
~2.5 [The formula for price elasticity of supply is: percentage change in the quantity supplied Over percentage change in the price percentage change in the quantity supplied/percentage change in the price With the midpoint method, we use average values for price and quantity. The percentage change in quantity supplied is: Q2 minus Q1 Over Qavg equals 20 Over 20 equals 100 percent Q2−Q1/Qavg= 20/20=100% The percentage change in price is: P2 minus P1 Over Pavg equals 50 Over 125 equals 40 percent P2−P1/Pavg= $50$125=40% So the price elasticity of supply is: 100 percent Over 40 percent equals 2.5 100%/40%=2.5]
How does the existence of substitutes for a product affect the product's price elasticity of demand?
~if there are many substitutes, the price elasticity of the good will be elastic [If a good has many substitutes, consumers can respond to price changes by switching products]
If demand for oil increases, what can we assume about the price elasticity of supply and demand?
Assumption ~The price elasticity of demand will be inelastic in the short run [Oil is a necessity, so consumers will not be very responsive to a change in price] ~The price elasticity of demand will be more elastic in the long run [Given time, higher gas prices at the pump will prompt consumers to change their consumption habits: for instance, by switching to more fuel-efficient cars] ~The price elasticity of supply will be inelastic in the short run [It takes time for producers to drill for and refine more oil, so their ability to respond quickly to a change in demand is limited] ~The price elasticity of supply will be more elastic in the long run [Given enough time, producers will be able to increase their output of oil] Not an Assumption ~The price elasticity of supply will be inelastic in the long run [If producers have enough time, they will be able to drill for and refine more oil] ~The price elasticity of demand will be elastic in the short run [Oil is a necessity that many people would have trouble living without] *[The difficulty with which producers can make new goods greatly affects the price elasticity of supply. It is difficult to quickly increase the output of refined oil, so producers will be fairly unresponsive to changes in demand. Meanwhile, consumers need gasoline for daily travel, so in the short run their demand will be unresponsive to changes in price as well. In the long run, both producers and consumers will find ways to respond to price changes]
Suppose that due to unfavorable growing conditions, this year's global coffee crop was unusually small. What can we assume about the short-run price elasticity of supply and demand for coffee?
Assumption ~The short-run price elasticity of demand will be inelastic [In the short run, there is a high demand for coffee because people are used to drinking it and many of them have a strong demand for caffeine] ~The short-run price elasticity of supply will be inelastic [Coffee growers cannot easily increase their supply of coffee because the growing conditions are beyond their control] Not an Assumption ~The short-run price elasticity of demand will be elastic [The long-run demand will be more elastic than the short run since coffee drinkers will have time to change their consumption habits] ~The short-run price elasticity of supply will be elastic [Over the long run, coffee growers may be able to compensate for changed growing conditions. But in the short run there is little they can do]
The textbook discusses several things that determine how price elastic the supply of a good or service is. These are known as the determinants of the price elasticity of supply. Changes in these determinants can cause the elasticity of supply to change. The figure below shows a supply curve that starts out perfectly inelastic at S1 and then becomes more elastic as it moves to S2, and then to S3. Which of the determinants of the elasticity of supply could this graph be representing?
Determinant Represented by the Graph ~the flexibility of producers [The three S lines could show different levels of flexibility] ~time and the adjustment process [S1 represents the short run, where producers do not have a lot of time to adjust to change, whereas S3 represents the long run, where the producer has adjusted and expanded output] Not a Determinant Represented by the Graph ~change in income [This graph does not depict income, which would be shown on a demand curve] ~the flexibility of buyers [There is no way to tell how responsive buyers are from looking at this graph]
Which determinants influence whether the price elasticity of demand is elastic or inelastic?
Determinant That Influences Elasticity ~the existence of substitutes [If consumers have the option of choosing similar products at a lower price, demand will be very elastic] ~time and the adjustment process [When consumers have more time to adjust to a change in the market, demand will be more elastic] ~the share of the budget spent on the good [Consumers are more sensitive (price elastic) to changes in the prices of goods that constitute a large share of their overall budget. For example, consumers tend to be very sensitive to changes in the prices of homes or cars and less sensitive to changes in the prices of pencils and paper] ~necessities versus luxury goods [When the need for a good or service is more important than the price, the price elasticity of demand will be inelastic] Not a Determinant That Influences Elasticity ~changes in the prices of a complementary good [Changes in the prices of complementary goods can affect the cross-price elasticity of demand, but they do not affect the "own-price" elasticity of demand] ~the per-unit cost firms must incur to supply a good to the market [Consumers' sensitivity to a price change has nothing to do with how much it costs a firm to produce a good or service] *[Any one or all four determinants can affect the price elasticity of demand for a product]
What are the determinants of the price elasticity of supply?
Determinant of the Price Elasticity of Supply ~time and the adjustment process [More time allows for greater adjustment of supply, thus the long run will be more elastic than the immediate run] ~the flexibility of producers [If a supplier can quickly increase production, supply will be elastic] Not a Determinant of the Price Elasticity of Supply ~how fast buyers react to a change in the price of the product or service [The ability for buyers to react to a change in price affects the price elasticity of demand, not supply] ~how much income buyers have [Income affects the income elasticity of demand, rather than supply] *[Elasticity of supply is a function of producers' ability to respond to price-driven changes in demand]
If an increase in the price of good E leads to a large decrease in the demand for good F, what is the relationship between the two goods?
Relationship between the Two Goods ~The goods are complements and the cross-price elasticity of demand is negative and large [When the increase in the price of one good leads to the decrease in demand for another good, we know the cross-price elasticity of demand for the goods is negative. Goods with a negative cross-price elasticity of demand are complements. The large decrease in demand tells us the cross-price elasticity is large] Not a Relationship between the Two Goods ~The goods are substitutes and the cross-price elasticity of demand is negative and large [When the cross price elasticity of demand is negative that means an increase in the price of Good E would lead to a decrease in the quantity demanded of Good F. That implies that a consumer must like to consume the goods together. Those goods are compliments] ~The goods are complements and the cross-price elasticity of demand is positive and large [If the cross price elasticity of demand were positive, an increase in the price of Good E would lead to an increase in the quantity demanded for Good F. That means when one Good E becomes more expensive the consumer switches some of the money they were spending on E and now spends it on Good F. Those two goods would be substitutes] ~The goods are complements and the cross-price elasticity of demand is negative and small [The price increase would prompt consumers to buy less of good F, but if the elasticity is small, the decrease would also be small. Here, the decrease in demand is large]
The graph below depicts a series of changes in the market for oil. The initial demand curve is D1, and the initial (short-run) supply curve is SSR. First, the demand for oil changes from D1 to D2. This leads to a price increase from $50 to $90. Then, over time, supply becomes more elastic as represented by the supply curve changing from SSR to SLR. This leads to a price drop from $90 to $80. What role does the elasticity of demand play in the price change from $90 to $80?
True ~The more elastic the demand, the greater the long-run equilibrium quantity (Q3) [The change in quantity between E2 and E3 depends on the slope of demand line D2: the flatter the line, the larger the quantity increase] ~The more elastic the demand, the smaller the price drop after the initial increase [The price change between E2 and E3 depends on the slope of demand line D2: the flatter the line, the smaller the price drop] False ~The more elastic the demand, the smaller the long-run equilibrium quantity (Q3) [Think about the effect of the slope of demand line D2 on the quantity increase from E2 to E3] ~The more elastic the demand, the larger the price drop after the initial increase [Think about the effect of the slope of demand line D2 on the price drop from E2 to E3]
Label each pair of products with the correct cross-price elasticity of demand.
deodorant and milk ~zero [A change in the price of milk would not change the demand for deodorant. These products are unrelated, meaning a change in the price of one has no impact on the demand for the other] tortilla chips and salsa ~negative [If the price of salsa rose, the quantity demanded for tortilla chips and other products used with salsa would likely fall. These products tend to be used together] Burger King and McDonald's ~positive [If Burger King raised its prices, quantity demanded for McDonald's would likely go up (and quantity demanded for Burger King would fall)] *[Products that are in no way related to each other will generally have zero cross-price elasticity of demand, whereas products that are either substitutes or complements will share some sort of relationship]
During the weekends, Juanita competes in eSports video game tournaments. She takes her computer to different events and plays her favorite computer-based video game, "ECON Legends 2." Juanita has won enough money from playing in tournaments to purchase a new computer. Order the scenarios below starting with the case where Juanita's price elasticity of demand would be the most elastic to least elastic (which is very inelastic).
~Juanita's current computer works well and puts her at no disadvantage compared to other players, but she thinks the computer itself is ugly compared to those her competitors bring to the tournaments [Since Juanita's computer does everything she needs and performs well, she has plenty of time to research different computers and find one that looks better] ~Juanita has been notified that an update for "ECON Legends 2" will be coming out in 3-6 months from now; the updated game will still run on her computer, but it will likely run much better on some of her competitors' computer [ Juanita has some time to find a new computer, so she can look for some alternatives, but she does not have a very long time to find a new computer] ~Juanita's computer was damaged in a lightning storm, and it no longer works at all [Juanita needs to find a new computer fast so she can get back to playing. She will not be able to shop around for alternatives] *[When consumers have a lot of time to react to changes in the cost of goods and services, the price elasticity of demand for those products becomes more elastic]
Holding the prices of goods constant, how does an increase in income affect consumer spending on necessities versus luxuries?
~as income increases, spending on luxuries increases more than spending on necessities [Consumers must spend on necessities regardless of their income level, but when their income increases, they are able to spend more on luxury items]
Fill in the blanks to complete the passage about elasticity between two goods. When the - between two goods is -, we know that the goods are - because an increase in the price of one good leads to a decrease in the quantity demanded of the other good.
~cross-price elasticity of demand ~negative ~complements *[For complements, when the price of one good increases, the demand for the complementary good falls]
Describe how to calculate the price elasticity of demand. The price elasticity of - equals the percentage change in - divided by the percentage change in -. When the percentage change in the quantity demanded is larger than the percentage change in price, the demand is -.
~demand ~the quantity demanded ~price ~elastic *[The price elasticity of demand helps measure how much consumers change their behavior when price changes: Price Elasticity of Demand equals percentage change in the quantity demanded Over percentage change in price Elasticity of Demand=percentage change in the quantity demanded/percentage change in price]
Why do economists use the midpoint method to calculate the price elasticity of demand between demand/price combination (Q1, P1) and combination (Q2, P2)? A simple calculation of the price elasticity of demand will yield - results depending on whether one considers the change as going from (Q1, P1) to (Q2, P2) or in the reverse direction. The midpoint method gives the same answer either way because it uses - price and - quantity as the basis for the - change calculations.
~different ~average ~average ~percentage *[The midpoint method standardizes the elasticity calculation, so that it does not depend on the direction of the change]
Fill in the blanks to explain how price elasticity of demand is related to total revenue. If a business sees that demand for its product is -, it makes sense to lower the price in order to - revenue. However, if demand is -, lowering the price will not increase revenue.
~elastic ~increase ~inelastic *[Price × Quantity = Revenue. A change in price could increase or decrease revenue; it all depends on how much quantity changes. Consider a firm that is currently selling 100 units of a good for $10. The firm is receiving $10 × 100 = $1,000 of revenue. Now consider two scenarios this firm could face (note that both scenarios follow the law of demand): Scenario 1: The firm increases price to $11 and demand is inelastic (insensitive). The quantity sold falls, but only a little to 95 units. This firm now has $11 × 95 = $1,045 of revenue, so revenue increased! Scenario 2: The firm increases price to $11 and demand is elastic (sensitive). The quantity sold falls by a good bit to 90 units. This firm now has $11 x 90 = $990 of revenue. Revenue decreased.]
Fill in the blanks to complete the passage about income and inferior goods. When consumers have more money, they are - likely to purchase inferior goods. When this is the case, it means that - elasticity of demand is -: as income goes up, demand goes -.
~less ~income ~negative ~down *[The formula for income elasticity of demand is: percentage change in the quantity demanded Over percentage change in income percentage change in the quantity demanded/percentage change in income]
Identify the statement that correctly describes the income elasticities of necessities.
~necessities have income elasticities between 0 and 1 [Because, by definition, most people are consuming the quantity of necessities they need, when income increases by 1% the quantity demanded of those necessities usually increases by less than 1%. This means the income elasticity that is between 0 and 1]
Describe how time affects the elasticity of supply. In the - run, a producer may have difficulty increasing its -, which makes supply -. However, in the - run the producer may be able to increase the quantity supplied to make its supply more -.
~short ~supply ~inelastic ~long ~elastic *[Suppliers need time to increase production because they may need more production facilities and other resources to keep up with demand]
Fill in the blanks to explain why the supply of oceanfront property is perfectly price inelastic. If the price of oceanfront property increases, the quantity - of land will stay the same. As a result, the price elasticity of - will be -.
~supplied ~supply ~inelastic *[The overall supply of oceanfront property that exists is fixed. Therefore, the overall supply does not respond to changes in price. At a high price or at a low price, the amount of oceanfront property remains the same]
For consumers with an income around $50,000 a year, you can expect the price elasticity of demand to be more elastic for a $20,000 ski boat than for a $1 roll of toilet paper.
~true [The boat is a luxury and buying it would take a large share of the person's income. Both of those characteristics make the demand for the good price elastic (sensitive)]
Match the product to its correct income elasticity.
0 < EI < 1 ~gasoline [Gas is a necessity. As income rises, demand will rise slightly, but not dramatically] EI > 1 ~big-screen televisions [A big-screen television is a luxury item. As income rises, demand will rise dramatically] EI < 0 ~dehydrated instant ramen noodles [Dehydrated instant ramen noodles are an inferior good. As income rises, most consumers will seek better alternatives and their demand for these types of noodles will fall] *[Demand for inferior products will fall as consumers have more money and can afford better alternatives. Meanwhile, demand for necessities will not change much as income rises because people are already buying the goods they need to survive]
As the prices in markets change, buyers and sellers respond in different ways according to how much time they have to react. Match the time period to its correct description.
Demand is somewhat elastic. Buyers have some time to adjust to a change in the market ~short run [This is like purchasing gas when your car is half full. You don't need the gas right away, so you have a short time to respond to a price change before you need to buy gas] Buyers have a significant amount of time to adjust to a change in the market. Demand is elastic ~long run [If gas prices continue to rise, you have the option to make decisions that will decrease your demand for gasoline in the long run, such as buying a more fuel-efficient car] Buyers have no time to adjust to a change in the market. Demand is inelastic ~immediate run [An example of this would be purchasing gas when your car is completely empty. You have no time to respond to a change in gas prices because you need the gas immediately] *[The amount of time a consumer has to respond to a change in price will greatly affect the price elasticity of demand]
The graph shows the short- and long-run price elasticity of demand and supply in a situation where demand for corn has increased. Match each label on the graph to the appropriate description.
equilibrium point once corn production increases to meet demand ~E3 [Once suppliers are responsive to the increase in demand, the price will fall] long-run quantity supplied ~Q3 [In the long run, suppliers have found a way to respond to a change in the demand] short-run quantity supplied ~Q2 [In the short run, suppliers cannot readily respond to a change in demand] equilibrium point before corn producers can meet increased demand ~E2 [The price will increase because the supply is not flexible] *[In the short run, suppliers cannot easily meet the increased demand, so the price jumps. Over time, as suppliers become more responsive to a change in demand, the price will retreat from its initial high]
Using the midpoint method described in the textbook, find the cross-price elasticity of demand for FedEx and UPS overnight shipping. The price of FedEx increased from $65 to $75. The quantity demanded of UPS increased from 1.2 million packages per day to 1.3 million. Round to two decimal places as necessary.
~0.56 [The formula for cross-price elasticity of demand is percentage change in the quantity demanded of one good Over percentage change in the price of a related good percentage change in the quantity demanded of one good/percentage change in the price of a related good With the midpoint method, we use average values for both the numerator and the denominator. The percentage change in quantity demanded of UPS is Q2 minus Q1 Over Qavg equals 0.1 million Over 1.25 million equals 8 percent Q2−Q1/Qavg=0.1 million/1.25 million=8% The percentage change in the price of FedEx is P2 minus P1 Over Pavg equals 10 over 70 equals 14.29 percent P2−P1/Pavg=$10/$70 =14.29% So the cross-price elasticity of demand is 8 percent Over 14.29 percent equals 0.56 8%/14.29%=0.56 This indicates that the two products are substitutes]
Talia's income has increased from $500 to $1,000 a week. As a result of this, Talia's consumption of tacos at Margarita's Mexican Grill has increased from 10 tacos a week to 50 tacos a week. What is Talia's income elasticity of demand, using the midpoint method?
~2 [Talia's income elasticity of demand can be determined using the midpoint method: {(50-10)/ [(10+50)÷2]÷(1000-500)/ [(500+1000)÷2]}=2]
What does the price elasticity of supply measure?
~the responsiveness of the quantity supplied to a change in price [The price elasticity of supply measures how much sellers respond to price changes]