Chapter 5: Elasticity and its Applications

What are the five determinants of more elastic demand?

More substitutes; long-run (more time to substitute); specific brands; luxuries; large part of budget

What type of number will the elasticity be for demand?

Negative

What is elasticity of demand?

Measures how responsive the quantity demanded is to a change in price; more responsive equals more elastic

What is elasticity of supply?

Measures how responsive the quantity supplied is to a change in price

When comparing two linear demand curves at a common point, the flatter curve is:

More elastic

If the price of Good Y falls from $10 to $8, and the quantity demanded of it rises from 1,000 units to 1,200 units, the price elasticity of demand expressed in absolute value is

(((1200-1000)/((1200+1000)/2) / ((8-10)/((8+10)/2)) = 0.82

The price of cigars is $10, with a quantity demanded of 1,000 per day. If the price increases to $12, the quantity demanded declines to 800 per day. What is the absolute value of elasticity of demand?

(((800-1000)/((800+1000)/2) / ((12-10)/((12+10)/2)) = 1.22

If Major League Baseball ticket prices rise by 15 percent, the number of tickets sold falls by 5 percent. The elasticity of demand is:

-5/15 = -1/3

If price increases from $10 to $20 and quantity decreases from 100 to 90, what is the total revenue?

$20*90 = 1,800; $10*100 = 1,000; 1,800 - 1,000 = 800; so total revenue increases by $800, meaning the demand curve must be inelastic

What is a perfectly inelastic supply curve?

A vertical line indicating that even a very large increase in price won't increase the quantity supplied

When demand is ______, an increase in price ______ total revenue A) inelastic; raises B) inelastic; lowers C) unit elastic; raises D) elastic; raises

A) inelastic; raises

Gun buyback programs will be less effective if the: A) supply of guns is more elastic B) supply of guns is more inelastic. C) demand for guns is more elastic. D) demand for guns is more inelastic.

A) supply of guns is more elastic

Which of the following probably has the least elastic demand? A) cable television B) prescription medications C) eggs D) McDonald's hamburgers

B) prescription medications

The demand curve for Froot Loops breakfast cereal is very elastic because: A) most breakfast cereals are considered a luxury good. B) there are many good substitutes for Froot Loops. C) the demand curve is negatively sloped. D) it is one of the most advertised cereals in the world

B) there are many good substitutes for Froot Loops

Which of the following mostly likely has a perfectly inelastic supply curve? A) seeds for fruit trees B) health insurance C) prehistoric cave paintings D) Star Wars movies

C) prehistoric cave paintings

The supply of a good tends to be more elastic if: A) a change in the price of the good causes only a small change in the quantity supplied. B) the good is considered a necessary good. C) production can be expanded without causing a big increase in the price of its inputs. D) an increase in production has only a minimal impact on demand for the good.

C) production can be expanded without causing a big increase in the price of its inputs

In the inelastic portion of a linear demand curve, firm revenue ______ when price falls. A) increases B) decreases C) remains the same D) changes in an indeterminate direction

Decreases

What are the four determinants of less elastic supply?

Difficult to increase production at constant unit cost (e.g., some raw materials); large share of market for inputs; global supply; short run

What are the four determinants of more elastic supply?

Easy to increase production at constant unit cost (e.g., some manufactured goods); small share of market for inputs; local supply; long run

In 2005, Ireland began taxing residents on how much garbage they threw away in an effort to promote recycling. In response, residents began burning trash (which is environmentally more harmful and resulted in an increase in burn victims as people accidentally set themselves on fire). This story suggests that the elasticity of demand for trash collection was more ______ than lawmakers believed because ______ than previously thought.

Elastic; there were more substitutes for trash collection

What are the five determinants of less elastic demand?

Fewer substitutes; short-run (less time to substitute); categories of a product; necessities; small part of budget

What is an application of supply elasticity?

Gun buyback programs: several cities in the U.S. have spent millions of dollars buying back guns; the objective is to reduce the number of guns in order to lower crime rates; principles of economics predict these programs are unlikely to reduce the number of guns on the streets; when police buy guns, the demand for guns increases; since the supply of guns to a local region is very elastic, the street price of guns does not increase; as a result, there is no decrease in the number of guns on the street.

What is the elasticity rule?

If two linear demand (or supply) curves run through a common point, then the curve that is flatter is more elastic

If the elasticity is more than 1, what does this mean?

It is elastic

If the elasticity is less than 1, what does this mean?

It is inelastic

If the elasticity is 1, what does this mean?

It is unit elastic

What type of number will elasticity be for supply?

Positive

What is the relationship between elastic and total revenue?

Price and revenue move in opposite directions, which means if price increases/decreases, total revenue decreases/increases

What is the relationship between inelastic and total revenue?

Price and revenue move together, which means if price increases/decreases, total revenue increases/decreases

What is the total revenue formula?

Price times quantity

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? c. Demand for Exxon gasoline at the corner of 7th and Grand vs. demand for gasoline in the entire city

The demand for Exxon gasoline at the corner of 7th and Grand is more likely to be elastically demanded than the demand for gasoline in the entire city because a local (specific) supply tends to be more elastic than a less specific geographic supply. If there is a price increase for Exxon gasoline at the corner of 7th and Grand, consumers can just go to the gas station down the street. There are much more substitutes for Exxon gasoline at the corner of 7th and Grand. Exxon gasoline for the entire city, however, would be less elastic because there would be less substitutes.

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? b. Demand for beef next month vs. demand for beef over the next decade

The demand for beef over the next decade is more likely to be elastically demanded than the demand for beef next month because consumers have time to adjust to the time change if there is a price change. The consumers are able to substitute their beef purchases to chicken or pork easier over the next decade than in the next month. This is why the demand for beef over the next decade is more elastically demanded.

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? a. Demand for tangerines vs. demand for fruit

The demand for tangerines is more likely to be elastically demanded than the demand for fruit because there are more substitutes for tangerines. A consumer can substitute tangerines for many different types of fruit, such as apples, strawberries, bananas, etc. Fruit does not have many substitutes that consumers can pick from.

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? a. Supply of apples over the next growing season vs supply of apples over the next decade

The supply of apples over the next decade will be more elastic than the supply of apples over the next growing season. Suppliers are able to hold their supply of apples and not sell as much if they know ahead of time that there will be a price increase over the next decade. They also are able to sell more apples now if they know there will be a price decrease over the next decade. Suppliers will not have as much time to adjust to the prices changes over the next growing season than they will over the next decade.

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? c. Supply of gold vs. supply of computers

The supply of computers is more likely to be elastically supplied than the supply of gold. Raw materials (in this case gold) tend to be less elastic because it is difficult to increase production without increasing unit costs. Gold is considered to be limited, so a unit cost increase is unavoidable. Manufactured goods (in this case computers) tend to be more elastic because suppliers are able to increase production without increasing unit costs.

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? b. Supply of construction workers in Binghamton, New York, vs. supply of construction workers in New York State

The supply of construction workers in Binghamton, New York would be more likely elastically supplied than the supply of construction workers in New York State because it is a more specific "market." If a supplier cannot supply 50 workers in New York State, this would not be as dramatic or responsive to the overall construction workforce. However, if a supplier cannot supply 50 workers in Binghamton, New York, this could have a dramatic or responsive effect on the construction workforce in that particular area. Therefore, this is why the supply of construction workers in Binghamton, New York would be more likely elastically supplied.

What if all cities have a gun buy back problem, what would happen to the supply curve?

The supply would not be perfectly elastic

Why is the demand curve for oil rather inelastic?

There are few widely available good substitutes for oil

Extensive flooding in the Midwest decreases the world supply of corn. If corn is inelastically demanded, what will happen to total revenues from corn production?

They will rise

Suppose that drug attics pay for their addiction by stealing: So the higher the total revenue of the illegal drug industry, the higher the amount of theft. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastics? What if the demand for drugs is inelastic? Explain.

When demand is inelastic, an increase in the price results in an increase in total revenue, and when demand is elastic, an increase in the price results in a decrease in total revenue. Therefore, the crackdown on suppliers causes an increase in stealing if demand is inelastic and a decrease in stealing if demand is elastic.

What is the relationship between unit elastic and total revenue?

When price changes, revenue stays the same

What is the midpoint formula to calculate the elasticity of demand?

|E| = Q after minus Q before divided by ((Q after + Q before) divided by 2) divided by P after minus P before divided by ((P after + P before) divided by 2)

What is one of the formulas to calculate elasticity of demand?

|E| = percentage change in quantity demanded / percentage change in price