Economics Module 5: Elasticity
Consumers suffer when
higher costs are passed on to them for products with inelastic demand
A perfectly elastic supply curve is
horizontal
The demand for cotton is inelastic and the supply curve has moved to the left because of a bug infestation. This will cause the equilibrium price to ________ and equilibrium quantity to ________.
increase; decrease
Slope and elasticity have different calculations and different meanings. The difference is that elasticity
is the percentage change between two variables and the slope is the change between two variables
If the price of both organic eggs and non-organic eggs increases, which one would have the highest responsiveness of quantity demanded to this change in price?
organic eggs
The formula for computing a growth rate is straightforward:
percent change = change in quantity/quantity
Certain groups of cigarette smokers, such as teenage, minority, low-income, and casual smokers, are somewhat sensitive to changes in price: for every 10 percent increase in the price of a pack of cigarettes, the smoking rates drop about 7 percent.
percent elasticity of demand = -7%/10% = -0.7%
price elasticity of supply
percentage change in the quantity supplied divided by the percentage change in price
If a change in price creates a larger change in quantity demanded, then we would say that the demand is
price elastic
The formula for calculating elasticity is:
price elasticity of demand = percent change in quantity/percent change in price
Suppose a new technological breakthrough increases production for an industry and shifts the supply curve to the right. This will be good news for a firm that
produces products that are considered elastic
The distinguishing feature of economic capital (as opposed to financial capital, like money) is that it is
productive
Elastic supply occurs if the change in quantity supplied is ________ a change in price.
relatively responsive to
When the government imposes and collects an excise tax from producers of a product, this
shifts the supply curve upward
In the ________, the consensus is the elasticity of savings is relatively inelastic, making the supply curve of savings relatively ________.
short run; steep
unitary elastic supply
supply responds exactly proportionately to a change in price; i.e. the percent change in quantity supplied is equal to the percent change in price
Consider a product that has perfectly elastic demand. Which of the following is most likely to be true about the price elasticity of demand?
the computed elasticity is infinite
If product X's price increases from $400 to $450 and product Y's quantity demanded increases from 15 to 20. Using the midpoint method, calculate the cross price elasticity of demand. Are they substitutes or complements?
the cross-price elasticity of demand is 2.43 and they are substitutes
The price elasticity of demand is zero and the demand curve is vertical when
the demand curve is perfectly inelastic
perfectly (or infinitely) elastic
the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
perfectly inelastic
the highly inelastic case of demand in which a percentage change in price, no matter how large, results in zero change in the quantity; thus, the price elasticity of demand is zero; vertical in appearance
Consider that your income has increased this year from $50,000 to $60,000. You bought 3 pairs of designer jeans last year and decide to purchase 5 pairs this year. Keeping all other factors the same, which statement is correct regarding your income elasticity of demand and the designer jeans?
the income elasticity of demand is 2.75 and the designer jeans are considered a normal good.
cross-price elasticity of demand
the percentage change in the quantity of good A that is demanded as a result of a percentage change in good B formula: cross-price elasticity of demand = % change in Qd of good A/ % change in price of good B
Total revenue is defined as ________ and represented by the formula ________.
the price of a product times the number of units sold; TR=P x Qd
Which of the following two goods illustrate a cross-price elasticity likely greater than zero?
the substitute goods of blueberries and strawberries.
Referring to Figure 3 above, which of the following statements is true?
the upperpart of the demand curve is considered more elastic
unitary elasticity
when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
inelastic demand
when the calculated elasticity of demand is less than one, indicating that a 1 percent increase in price paid by the consumer leads to less than a 1 percent change in purchases (and vice versa); this indicates a low responsiveness by consumers to price changes
elastic supply
when the calculated elasticity of either supply is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
Suppose that a job pays $10 per hour. At some point, the individual doing the job is given a $2-per-hour raise. The percentage change (or growth rate) in pay is
$2/$10 = 0.20 or 20%
Suppose a veggie burger goes up in price from $6 to $9. The percentage change or growth rate in price is ________.
3/6 or 50%
point elasticity approach
approximate method for solving for elasticity in which the percent changes are measured relative to the initial quantity demanded and price; the initial quantity demanded is subtracted from the new quantity demanded, then divided by the initial quantity demanded; similarly, the initial price is subtracted from the new price, then divided by the initial price.
Demand is relatively inelastic if ________.
buyers do not respond much to the change in price
When tasks involved with producing a good or service are divided, workers and businesses
can produce a greater quantity of those goods and services
A life sustaining medicine would most likely have a price elasticity of demand ________.
close to zero
The ________ is negative for complementary goods and positive for substitute goods.
cross-price elasticity of demand
You are the manager of a restaurant and would like to increase revenue. The servers suggest decreasing the price of drinks and food. The servers' recommendation is based on the assumption that
demand for food and drinks is elastic
Suppose the government adopts a public policy to fight obesity using an excise tax. When considering elasticity, consumers would probably pay more of this tax on fast food than the producers if
demand is in inelastic and supply is elastic
tax incidence
distribution of the tax burden between buyers and sellers
Some highways have commuter or express pass lanes. During rush hour lanes on the highway move slowly or often are stop and go, but the express lanes continue to move at a faster pace. Express pass users pay for a transponder and monthly fees to have express lane access even with no other people in their cars. In this example, the drivers who purchase these express passes are probably
drivers who value speed and convenience more than those in the stop and go lanes and are willing to pay additional express pass fees for the option of avoiding traffic jams
Automobiles would be considered _____ demand.
elastic
If the government wanted to encourage savings by offering a tax break, such a policy would increase savings most effectively if the supply curve for financial capital is
elastic
Restaurant meals would be considered _____ demand.
elastic
The price of a Pop Socket is $10.00, and the quantity demanded is 5,000 per day. When the price falls to $8.00, the quantity demanded increases to 7,000 per day. Based on this information and using the midpoint method, the demand for Pop Sockets must be ________.
elastic
Although slightly more complicated to calculate, one reason the midpoint (arc) elasticity approach is considered more accurate is that it
gives the same answer regardless of which price and which quantity should be in the denominator
elastic unitary inelastic
if % change in quantity > % change in price then computed elasticity > 1 if % change in quantity = % change in price then computed elasticity = 1 if % change in quantity < % change in price then computed elasticity < 1
Suppose you buy a new car instead of a used car when your income rises. This implies the
income elasticity of demand for the used car is negative
income of elasticity of demand formula:
income of elasticity of demand = % change in quantity demanded/% change in income
Consider a product with price elasticity of demand < 1.0. A 5% increase in the price of this product will cause total revenue to ________.
increase
short run vs. long run
Price elasticity of demand is usually lower in the short run, before consumers have much time to react, than in the long run, when they have greater opportunity to find substitute goods. Thus, demand is more price elastic in the long run than in the short run.
Which of the following questions would be asked by an economist studying elasticity?
How responsive are consumers and producers to changes in price?
substitutes
Price elasticity of demand is fundamentally about substitutes. If it's easy to find a substitute product when the price of a product increases, the demand will be more elastic. If there are few or no alternatives, demand will be less elastic.
Which of the following items is most likely to have price elasticity of demand above 1.0?
airline tickets
elasticity
an economics concept that measures responsiveness of one variable to changes in another variable
Using the midpoint method, the price elasticity of demand is determined to be about 0.67. What change in the price would cause a 12% increase in the quantity demanded?
a 17.9% decrease in the price
solving using midpoint method (more accurate) Suppose the quantity demanded of a product was 100 at one point on the demand curve, and then it moved to 103 at another point. The growth rate, or percentage change in quantity demanded, would be the change in quantity demanded (103−100)(103−100) divided by the average of the two quantities demanded:
(103-100)/(103+100)/2 = 3/101.5 = 0.0296 = 2.96% growth
If the price of a product changes by $2 (from $7 to $9) and the quantity demanded changes by 10 units (from 50 to 40 units) then the price elasticity of demand using the midpoint approach is ________.
0.89
necessities vs. luxuries
A necessity is something you absolutely must have, almost regardless of the price. A luxury is something that would be nice to have, but it's not absolutely necessary. Consider the elasticity of demand for cookies. A buyer may enjoy a cookie, but it doesn't fulfill a critical need the way a snow shovel after a blizzard or a life-saving drug does. In general, the greater the necessity of the product, the less elastic, or more inelastic, the demand will be, because substitutes are limited. The more luxurious the product is, the more elastic demand will be.
competitive dynamics
Goods that can only be produced by one supplier generally have inelastic demand, while products that exist in a competitive marketplace have elastic demand. This is because a competitive marketplace offers more options for the buyer.
share of a consumer's budget
If a product takes up a large share of a consumer's budget, even a small percentage increase in price may make it prohibitively expensive to many buyers. Take rental housing that's located close to downtown. Such housing might cost half of one's budget. A small percentage increase in rent could cause renters to relocate to cheaper housing in the suburbs, rather than reduce their spending on food, utilities, and other necessities. Therefore the larger the share of an item in one's budget, the more price elastic demand is likely to be. By contrast, suppose the local grocery store increased the price of toothpicks by 50 percent. Since toothpicks represent such a small part of a consumer's budget, even a significant increase in price is likely to have only a small effect on demand. Thus, the smaller the share of an item in one's budget, the more price inelastic demand is likely to be.
midpoint elasticity approach
Most accurate approach to solving for elasticity in which the percent changes in quantity demanded and price are measured relative to the average quantity demanded and price; the initial quantity demand is subtracted from the new quantity demanded; then divided by the average of the two quantities demanded; similarly, the initial price is subtracted from the new price, then divided by the average of the two prices percent change in quantity = Q2-Q1/(Q2+Q1)/2 * 100 percent change in price = P2-P1/(P2+P1)/2 * 100
Consider consumers' dependence on gas. Which statement tends to be true about how elasticity affects equilibrium when a shift in supply decreases the amount of gas available to consumers?
a higher price and a lower quantity will result for both inelastic and elastic demand for gas in equilibrium. however, the short run will have a much higher price increase and a smaller quantity reduction while the long run price will be much lower price increase and a larger quantity reduction
If wages increase by 10%, a(n) ________ worker is likely to supply 7% more labor because elasticity of labor supply is assumed to be ________.
adult; inelastic
A negative cross-price elasticity of demand between two products would indicate they are
complements
An increase in demand will shift the demand curve to the right, therefore ________ the equilibrium price.
increasing
A smoker who is willing to pay whatever it takes to support a smoking habit likely has ________ demand.
inelastic
An addicted smoker likely has which type of demand?
inelastic
Keeping the concept of elasticity in mind, which of the following products have elastic demand and which have inelastic demand? Physician visits would be considered _____ demand.
inelastic
Suppose new firms enter the energy drink market space moving the supply curve to the right. Consumers who purchase energy drinks will be better off if the product is considered ________.
inelastic
Tap water would be considered _____ demand.
inelastic
Suppose the price elasticity of supply has been calculated for LaCroix sparkling water at 1.3 and the price increases by 15%. What would happen to the quantity supplied?
it would increase by 19.5%
Suppose the price elasticity of supply has been calculated as 0.80 for a particular product and the price increases by 5%. What would happen to the quantity supplied?
it would increase by 4%
All price elasticities of demand have a negative sign which reflects the inverse relationship of the
law of demand
more elastic
the calculated elasticity is greater in absolute value, meaning the quantity response is greater to the same change in price
electricity of labor supply (wage elasticity of labor supply)
the percentage change in hours worked divided by the percentage change in wages formula: electricity of labor supply = % change in quantity of labor supply/% change in wage
(relatively) elastic
the percentage change in quantity demanded is greater than the percentage change in price; measured price elasticity of demand is greater than one (in absolute value)
(relatively) inelastic
the percentage change in quantity demanded is less than the percentage change in price; measure price elasticity of demand is less than one (in absolute value)
total revenue
the price of an item multiplied by the number of units sold: TR = P x Qd
When supply is inelastic and demand is elastic, the tax incidence falls on ________.
the producer
unitary elastic
when a given percent price change in price leads to an equal percentage change in quantity demanded
elastic demand
when the calculated elasticity of demand is greater than one, indicating a high responsiveness of quantity demanded or supplied to changes in price
inelastic supply
when the calculated elasticity of supply is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in production by the firm; this indicates a low responsiveness of the firm to price increases (and vice versa if prices drop)
