Elasticity
elastic demand:
a high responsiveness of quantity demanded or supplied to changes in price
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.
Which of the following questions would be asked by an economist studying elasticity?
How responsive are consumers and producers to changes in price? The economic concept of elasticity is a measurement of the responsiveness of one variable (quantity demanded by consumers/quantity supplied by producers) to changes in another variable (price).
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%. Price elasticity of supply is the percentage change in the quantity change in the quantity of a good or service supplied divided by the percentage change in the price times 100. So the calculation is 1.3 = % change in quantity supplied/15%, (1.3 x 15%) x 100 = 19.5%
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. Eggs are considered relatively inelastic because they have few substitutes and because eggs are relatively inexpensive making them a small share of a consumer's budget.
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.
What does this concept represent?
The percentage change in quantity demanded divided by the percentage change in price. The formula that we'll use here is price elasticity of demand, which is the percentage change in quantity demanded divided by the percentage change in price.
Suppose that the price of laundry detergent decreases from $4.3 to $3.6. As a result, quantity supplied decreases from 270 to 200. Based on this information classify the supply curve.
The supply curve is elastic
inelastic demand:
a low responsiveness by consumers to price changes
Which of the following items is most likely to have price elasticity of demand above 1.0?
airline tickets. A price elasticity of demand above 1.0 means the item is elastic which indicates a larger reaction to price change. Airline travel is a competitive market and is considered by many to be a luxury with many substitutes.
Elastic supply occurs if the change in quantity supplied is ________ a change in price.
relatively responsive to The price of supply measures how much quantity supplied changes in response to a change in the price. Elastic supply responds more than proportionately to a change in price; i.e. the percent change in quantity supplied is greater than percent change in price.
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
Now let's look at the second part of the formula. How do we find the percentage change in price using the midpoint formula?
The change in price divided by the average price, multiplied by 100.
Let's look at the first part of the formula. How do we find the percentage change in quantity using the midpoint formula?
The change in quantity divided by the average quantity, multiplied by 100.
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. This demand curve refers to the extreme case in which the quantity demanded increases by an infinite amount in response to any decrease in rice at all and the demand 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
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
A smoker who is willing to pay whatever it takes to support a smoking habit likely has ________ demand.
inelastic. This is a real world example of inelastic demand. if a large change in price happens then a very small change in quantity demanded would result because the smoker has a habit that needs to be met.
Slope and elasticity have different calculations and different meanings. The difference is that elasticity
is the percentage change between two variables and slope is the change between two variables. The definition of elasticity is the percentage change in quantity demanded divided by the percentage change in price and the definition of slope is the change in y over the change is x or rise/run.
All price elasticities of demand have a negative sign which reflects the inverse relationship of the
law of demand. The negative sign reflects the law of demand so at a higher price, the quantity demanded for a good or service declines. All price elasticities of demand have a negative sign so it's easiest to think about elasticity in absolute value, ignoring the negative sign.
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 price elasticity of demand is zero and the demand curve is vertical when
the demand is perfectly inelastic. The quantity demanded remains the same when price increases or decreases. Consumers are completely unresponsive to changes in price.
Elasticity measures the behavioral response of economic agents in a given situation. Here are some examples
- If a business raises its prices, will that have a large or small impact on demand? - If you get a pay raise, how much more will you spend on food, clothing or entertainment? - If hot dogs go on sale at the grocery store, how much additional mustard will consumers purchase?
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
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%. The calculation would be the change in price or difference between $6 and $9 divided by the price or $6. So $3/$6 = 1/2 or .5 or 50%
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.
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.
elasticity:
an economics concept that measures responsiveness of one variable to changes in another variable
A life sustaining medicine would most likely have a price elasticity of demand ________.
close to zero. Since the medicine is essential for living it makes the demand for the medicine highly in elastic and the elasticity is closer to zero.
A negative cross-price elasticity of demand between two products would indicate they are
complements. Complement goods have negative cross-price elasticities: if good A is a complement for good B, like coffee and sugar, then a higher price for B will mean a lower quantity of A consumed.
Suppose that you know that the price elasticity of demand is 1.7. If we increase the price of the this product, then that the total revenue will
decrease
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 drinks and food 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 inelastic and supply is elastic.
tax incidence:
distribution of the tax burden between buyers and sellers
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. It uses the average price and average quantity over the price and quantity change to calculate elasticity of demand.
Consumers suffer when
higher costs are passed on to them for products with inelastic demand
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. If your income rises and causes a decrease in the quantity demanded of a used car, it means your income elasticity of demand is negative because they are moving in different directions.
Suppose that you know that the price elasticity of demand is 2. If we decrease the price of the this product, then that the total revenue will
increase
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. The given scenario will cause an increase in total revenue. A product with a price elasticity of demand < 1.0 means it is inelastic.
Share of the 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.
When the local grocery store puts laundry detergent on sale, reducing its price from $4.40 per item to $3.80 per item, the quantity sold increases from 190 per week to 230 per week. This response illustrates which of the following concepts?
Price Elasticity of Demand. The formula that we'll use here is price elasticity of demand, which is the percentage change in quantity demanded divided by the percentage change 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.
Short run versus 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.
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.
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 The wage elasticity of labor supply for adult workers in their thirties and forties is though to be fairly inelastic. When wages move up or down by a certain percentage amount, the quantity of hours that adults in their prime earning years are willing to supply changes but by a lesser percentage amount.