Elasticity

If the cross-price elasticity of hamburgers and ketchup is −0.6, and the price of hamburgers increases by 50%, how would be the percentage change in the quantity of ketchup demanded?

30% (-0.6) (50%) x100

Elasticity

A measure of how responsive one variable is to a change in another variable; calculated as the percentage change in quantity divided by the percentage change in price.

Price Elasticity of Demand

A measure of how responsive quantity demanded is to a change in price; calculated as the percentage change in quantity demanded divided by the percentage change in price.

Cross-Price Elasticity of Demand

A measure of the effect of a change in the price of one product on the quantity demanded of another; calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Whether a good or a service is a luxury or a necessity is determined by the

Buyer

Using absolute values in the inelastic range of the demand curve,:

% change in quantity demanded < % change in price.

Using absolute values in the elastic range of the demand curve,:

% change in quantity demanded > % change in price.

midpoint percentage change in price

(P2-P1)/[(P2+P1)/2

midpoint percentage change in quantity

(Q2-Q1)/[(Q2+Q1)/2

Price Elasticity of Demand Midpoint Formula

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

When the product price falls from $40 to $30, the quantity demanded rises from 500 to 600 units. Using the midpoint formula, the price elasticity of demand in this range is:

-0.636

When the product price falls from $150 to $120, the quantity demanded rises from 1000 to 1200 units. Using the midpoint formula, the price elasticity of demand in this range is:

-0.82

When the product price falls from $80 to $60, the quantity demanded rises from 500 to 800 units. Using the midpoint formula, the price elasticity of demand in this range is:

-1.62

Suppose the price of movie tickets decreases by 4%, causing the quantity demanded of popcorn to increase by 10%. What would the cross-price elasticity for movie tickets and popcorn be in this example?

-2.5

Suppose that when the price of gasoline is $3 per gallon, the total amount of gasoline supplied in the United States is 12 million barrels per day. Also suppose that when the price of gas decreases to $2.25 per gallon, the total amount of gasoline supplied is 8 million barrels per day. Based on these numbers and using the midpoint formula, the price elasticity of supply of gasoline is:

1.39

Suppose that the quantity of umbrellas demanded at a price of $8 is 2,500 units. The company's total revenue is $

20,000

E b/a = %changeQ d,b / %change P a

Cross-Price Elasticity of Demand

When two goods are complements, if the price of good A increases, it generates a(n)

Decrease in demand for good B

When consumers have more time to adjust, demand becomes relatively more

Elastic

E = % change Q / % change P

Elasticity

Ei = %change Q / % change I

Income Elasticity of Demand

A cross-price elasticity of demand of -1.25 means that if the price of A decreases by 1%, the quantity demanded of good B will

Increase by 1.25

A cross-price elasticity of demand of -0.75 means that if the price of good A decreases by 10%, the quantity demanded of good B will

Increase by 7.5

In the ______ range of the demand curve, the percentage change in quantity demanded is less than the percentage change in price.

Inelastic

perfectly elastic demand

Infinite price elasticity of demand; quantity demanded that is so responsive to a change in price that if price increases or decreases, quantity demanded decreases to zero.

The lower range of a linear demand curve is relatively:

Less elastic

|Ed| = 0

Perfectly inelastic Demand

Unit-Elastic Demand

Price elasticity of demand equal to 1 in absolute value; prices and quantities demanded change by equal percentages, such that if price changes by 1%, quantity demanded changes by 1% as a result.

Perfectly inelastic Demand

Price elasticity of demand equal to zero; quantity demanded is completely nonresponsive to price changes, such that any increases or decreases in price leave quantity demanded unchanged.

Elastic Demand

Price elasticity of demand greater than 1 in absolute value; quantity demanded that is relatively more responsive to a change in price, such that if price changes by 1%, quantity demanded changes by more than 1% as a result.

Inelastic Demand

Price elasticity of demand less than 1 in absolute value; quantity demanded that is relatively less responsive to a change in price, such that if price changes by 1%, quantity demanded changes by less than 1% as a result.

Price elasticity of demand is influenced by the ___ of income spent on a good or service.

Proportion

Long Run

The time period in which all inputs of production can be changed.

Short Run

The time period in which at least one input of production is fixed but other inputs can be changed.

Generally, we calculate elasticity as the change in quantity demanded/supplied divided by the change in price. percentage change in price divided by the percentage change in quantity demanded/supplied. percentage change in quantity demanded/supplied divided by the percentage change in price. percentage change in quantity demanded/supplied divided by the change in price.

c

Which of the following statements is true? Slope is the inverse of elasticity. Elasticity is the inverse of slope. Slope uses changes in price and quantity. The elasticity calculation uses percentage changes in price and quantity. A relationship exists between slope and elasticity but they are not the same thing.

c d e

If the price of good A increases and generates a decrease in the demand for good B, then the two goods are:

complements

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good is the:

cross-price elasticity of demand.

Elasticity differs from the slope as a measure of responsiveness to changes in prices because elasticity is only useful for describing demand, but the slope is useful for describing demand and supply. the slope is always negative, while elasticity is not. elasticity changes depending on the currency prices are measured in, but this does not affect the slope. percentage changes do not depend on the units of measurement, whereas the slope does.

d

Income elasticity of demand is a measure of how responsive:

demand is to a change in consumer income.

The price elasticity of demand usually ______ as you move along the demand curve for any kind of good.

differs

When demand is inelastic it is _____ for firms to ____ prices to increase total revenue.

easier; raise

| Ed | > 1 is

elastic

When comparing the elasticity of two different supply curves, the one that is __ is relatively more elastic all else held constant.

flattest

A cross-price elasticity of demand of 1.25 means that if the price of A increases by 1%, the quantity demanded of good B will

increase by 1.25

It has been estimated that the price elasticity of demand for attending Atlanta Braves baseball games is -0.57.1 If price were the only factor to change, one might conclude that a decrease in attendance of 11.4% was caused by

increase of 20%

The more a good or a service is considered to be a necessity, the relatively more ____ demand will be.

inelastic

|Ed| < 1 is

inelastic

A price elasticity of demand that is calculated as -0.61 would be considered:

inelastic because its absolute value is less than 1.

Supply is perfectly elastic when the value of the price elasticity of supply is ______

infinite

Elasticity can be used to compare responsiveness across different goods and across countries because:

it has no units attached to it.

When demand is inelastic, consumers are (less/more) responsive to changes in prices.

less

In the _______, you can buy a larger oven or even build a larger facility also, and you'll be able to increase bread production even more.

long run

Over time, supply in a market evolves and becomes relatively _____ elastic.

more

The more a good or a service is considered to be a ______, the relatively less elastic demand will be.

need

Cross-price elasticity of demand uses:

negative and positive values to determine if goods are substitutes or complements.

With income elasticity of demand a positive value represents ____ goods

normal

The price elasticity of demand is a negative number because:

of the law of demand.

|Ed| = infinity

perfectly elastic

With cross-price elasticity of demand,: ______ value indicates substitutes and _______ value indicates complements.

positive; negative

When the product price falls from $90 to $80, the quantity demanded rises from 600 to 700 units. The _____ in this range is -1.31.

price elasticity of demand

In the ______, you can hire more employees and use more dough to make more bread, but you can't increase the actual size of your bakery.

short run

When the product price falls from $90 to $80, the quantity demanded rises from 600 to 700 units. The _________ in this range is -0.10.

slope

The effect of policies will change over time as:

supply becomes relatively more elastic.

The slope of a linear demand curve is:

the change in price divided by the change in the quantity demanded.

The greater the change in price,:

the less reliable the elasticity estimate is going to be.

Along the elastic range of the demand curve,:

the percentage change in quantity demanded is greater than the percentage change in price.

Price elasticity of demand is a measure of how responsive:

the quantity demanded is to a change in price.

If demand is inelastic, decreasing prices will decrease ,

total revenue.

|Ed|=1 is

unit elastic

Elasticity has no ____

units

In terms of proportion of income spent on the item, place the following items in order from least elastic (most inelastic) to most elastic. The least elastic item should be placed on top/first in the list. Based on #of subs & proportion of income spent on it -luxury car -computer -clothing -bottle of water

-bottle of water -clothing -computer -luxury car

If the price elasticity of demand for music downloads is −1.5, then a 1% increase in the price of music downloads should lead to a _____ decrease in the quantity of music downloaded.

1.5%

Suppose that when the price of gasoline is $3.50 per gallon, the total amount of gasoline supplied in the United States is 8 million barrels per day. Also suppose that when the price of gas decreases to $3 per gallon, the total amount of gasoline supplied is 6 million barrels per day. Based on these numbers and using the midpoint formula, the price elasticity of supply for gasoline is:

1.86

Suppose the cross-price elasticity of beef and pork is 0.3. If the price of beef increases by 25%, the quantity of pork demanded would change by ______%

7.5

Normal Good

A good for which there is a direct relationship between the demand for the good and income. For normal goods, an increase in income increases demand, and a decrease in income decreases demand; a good with a positive income elasticity of demand.

Inferior Good

A good for which there is an inverse relationship between the demand for the good and income. For inferior goods, an increase in income decreases demand, and a decrease in income increases demand; a good with a negative income elasticity of demand.

Income Elasticity of Demand

A measure of how responsive demand is to a change in consumer income; calculated as the percentage change in the quantity of a good or service demanded divided by the percentage change in income.

A price elasticity of demand of -1.25 means that if the price increases by 1% ,the quantity demanded will _________ by ________ %.

Decrease; 1.25

Immediate Period

The time period in which producers cannot increase their use of economic resources to increase quantity supplied.