Elasticity
What happens when the quantity demanded is very responsive to changes in price? The percentage change in quantity demanded will be
Greater than the percent change in price
If the demand for orange juice is elastic, will a decrease in the price of orange juice increase or decrease the revenue received by orange juice sellers? If the price of orange juice decreases, revenue will
Increase
How else can you calculate the price elasticity of demand?
Price elasticity of demand can be calculated using initial values for price and quantity. Price elasticity of demand can be calculated using final values for price and quantity.
If you start at point A on D1, what is the percentage change in quantity demanded when price falls from $30 to $20? Use the midpoint formula to calculate this percentage change.
Quantity demanded rises by 55 percent
Calculate the total revenue generated from Pace's freshman class in 2005 in 2006
Tuition times students 35340000 33152000 Total amount of tuition fell
Why isn't elasticity just measured by the slope of the demand curve?
The measurement of slope is sensitive to the units chosen for quantity and pricemeasurement of slope is sensitive to the units chosen for quantity and price.
What is the advantage of the midpoint method?
The midpoint formula will give the same value whether moving from the higher price to the lower price or from the lower price to the higher price
What is the midpoint method for calculating price elasticity of demand? The midpoint method for calculating price elasticity of demand is:
the change in quantity divided by the average of the initial and final quantities divided by the change in price divided by the average of the initial and final prices.
What is the formula for the price elasticity of demand? The formula for the price elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in price.
Suppose the figure to the right illustrates the monthly demand for imported rugs at a local rug gallery. Suppose the price of rugs increases from $4000 to $4500 Total revenue before the price change is Total revenue after the price change is The change in total revenue is The demand for rugs at this given rug gallery is
$320000 $315000 -5000 Elastic
Economists' estimates of price elasticities can differ somewhat, depending on the time period and on the markets in which the price and quantity data used in the estimates were gathered. An article in the New York Times contained the following statement from the Centers for Disease Control and Prevention: "A 10 percent increase in the price of cigarettes reduces consumption by 3 to 5 percent." Given this information, compute the range of price elasticity of demand for cigarettes. According to the article, the price elasticity of demand for cigarettes ranges from . 3.3 (the lowest end of the range in absolute value) to . 5.5. (Enter your responses as real numbers rounded to two decimal places.) Explain whether the demand for cigarettes is elastic, inelastic, or unit elastic. The price elasticities in this range A. are inelastic during a portion of the range and elastic during a portion of the range. B. are inelastic because they are less than zero. C. are inelastic because they are less than one (in absolute value). D. are unit−elastic because they are less than zero. E. are unit−elastic because they are less than one (in absolute value). If cigarette manufacturers raise prices, will their revenue increase or decrease? Briefly explain. If manufacturers raise prices, then their revenue will A. increase because price will increase. B. remain unchanged because quantity will decrease as price increases. C. increase because the percentage increase in price will be larger than the percentage decrease in quantity. D. decrease because quantity will decrease. E. decrease because the percentage increase in price will be larger than the percentage decrease in quantity.
-.3 -.5 C C
In 1916, the Ford Motor Company sold 500,000 Model T Fords at a price of $440. Henry Ford believed that he could increase sales of the Model T by 1,000 cars for every dollar he cut the price. Use this information to calculate the price elasticity of demand for Model T Fords. Assuming the price decreases by $1 and the quantity increases by 1000 cars, the price elasticity of demand for Model T Fords is
-0.88
In fall 2006, Pace University in New York raised its annual tuition from $24800 to $29,600. Freshman enrollment declined from 1,425 in fall 2005 to 1,120 in fall 2006. Assuming that the demand curve for places in the freshmen class at Pace did not shift between 2005 and 2006, use this information to calculate the price of elasticity demand. The demand is price elastic
-1.33
Consider the market for a new DVD movie, where the price is initially $20 and 20 copies are sold per day at a superstore, as indicated in the figure to the right. The superstore is considering lowering the price to $18. What is the price elasticity of demand between these two prices (use the Midpoint Formula)? The price elasticity of demand is
-1.727
When quantity demanded is completely unresponsive to price, what is the value of price elasticity of demand?
0
If a 26 percent increase in the price of Cheerios causes a 29 percent reduction in the number of boxes of cereal demanded, the price elasticity of demand for Cheerios is Demand is elastic
29/26=1.12
If demand is perfectly elastic, then what is the effect of an increase in price?
A decrease in quantity demanded to 0
If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25 percent, demand for Red Bull is _______ in this range.
Elastic
