Module 4: Elasticity
price elasticity of demand
% change in quantity demanded / % change in price
price elasticity of demand
( (Q2 - Q1) / [(Q2+Q1)/2] ) / ( (P2 - P1) / [(P2+P1)/2] )
% change in quantity demanded
( Q2 - Q1 / Average of Q ) = ( Q2 - Q1 / (Q2 + Q1 / 2) )
The general formula for the income elasticity of demand is
(% change in Q demanded) / (% change in income)
The general formula for the cross-price elasticity of demand is
(% change in Q of A demanded) / (% change in P of B)
Along a linear demand curve, price elasticity of demand is which of the following?
- elastic at higher prices - inelastic at lower prices
A line with a slope of (-5) will be _____ than a line with a slope of (-2).
- less elastic - steeper - more inelastic
What are the most commonly used measures of elasticity?
- price elasticity of supply - price elasticity of demand
What are the factors that affect the price elasticity of supply? nice
- the availability of inputs - the flexibility of the production process - time needed to adjust to changes in price
Which of the following factors determine the price elasticity of demand?
- time needed to adjust to price changes - availability of substitutes
Suppose the demand for coffee went from 12 million cups at $2 to 15 million cups at $1.50. Using the mid-point formula, the price elasticity of demand is approximately ________.
-0.78
Suppose the demand for coffee went from 10 million cups at $2 to 15 million cups at $1.80. Using the mid-point formula, the price elasticity of demand is approximately ______.
-3.80
Suppose the price of coffee beans goes from $1 to $1.20 per pound, production increases from 90 million bags of coffee beans per year to 100 million bags. Using the midpoint method, the price elasticity of supply would be approximately, _______.
.60
The closer the number representing the slope is to ______ , the flatter the curve will be
0
When the absolute value of the price elasticity of demand is greater than ______, we say that demand is elastic.
1
When the absolute value of the price elasticity of demand is less than ______, we say that demand is inelastic.
1
When the price elasticity of supply is equal to ______, we say that supply is unit-elastic.
1
Suppose the price of coffee beans goes from $1 to $1.35 per pound, production increases from 72 million bags of coffee beans per year to 100 million bags. Using the midpoint method, the price elasticity of supply would be ______.
1.09
The general formula for the price elasticity of supply is
% change in Q supplied / % change in P.
Total revenue is the ______ of a good or service that is sold multiplied by the price paid for each unit.
amount
Total revenue is the ______ sold multiplied by the ______ paid for each unit.
amount (quantity) - price
If demand is relatively inelastic, then an increase in price will cause
an increase in total revenue.
The concept of elasticity allows economic decision makers to
anticipate how others will respond to changes in market conditions.
In order to avoid dependence on which unit of measurement used, the price elasticity of demand is computed using ______ changes.
percentage
The following equation, ((Q2−Q1)/Q1) x 100 illustrates a ______ change in quantity demanded.
percentage
The mid-point method solves the direction problem because it measures the
percentage change relative to a point midway between the two points.
Economists use the percentage change in quantity rather than the absolute change in quantity to measure the price elasticity of demand because
percentage changes are not influenced by the unit of measure.
If a good is a luxury, income elasticity of demand will be
positive but greater than 1.
If a good is a necessity, income elasticity of demand will be
positive but less than 1
When consumers' buying decisions are highly influenced by changes in ______, we say that their demand curve is more elastic.
price
The price elasticity of demand will always be a negative number because
price and quantity demanded move in opposite directions.
When demand is inelastic,
price decreases will decrease total revenue.
When demand is inelastic and the price changes, the
price effect outweighs the quantity effect.
One factor that does NOT determine the price elasticity of demand is
prices of related complements.
Supply is less elastic over short periods than over long periods because
producers can make more adjustments in the long run than in the short run.
Supply is more elastic over long periods than over short periods because
producers can make more adjustments in the long run than in the short run.
The factors that affect the price elasticity of supply do not include
relative need and relative cost.
When there is a decrease in price, the price effect will decrease the total ______.
revenue
Knowing whether the demand for a good is elastic or inelastic is useful in business, because it allows a manager to determine whether a price increase will cause total ______ received by the firm to rise or fall.
revenue (profit)
For normal goods, ______ elasticity is positive.
supply
The price elasticity of is given by: (%ΔQS)/(%ΔP)
supply
If producing more of a good costs a lot more than the initial quantity did,
supply will be less elastic.
As quantity increases, the price elasticity of demand falls along a linear demand curve because
the percentage change in price rises as the quantity increases.
Supply would be less elastic if
the production process is less flexible.
Supply would be more elastic if
the production process is more flexible.
When demand is elastic and the price changes,
the quantity effect outweighs the price effect.
In the long run demand is more elastic because
there is more time to seek alternatives.
When demand is inelastic,
total revenue increases with price increases.
True or False: If close substitutes are available for a particular good, then the demand for that good will be more elastic than if only distant substitutes are available.
true
True or False: When there is a decrease in price, the quantity effect on revenue results from selling more units of the good.
true
True or false: The price elasticity of demand for the good with a linear demand curve at a price of $25 will be higher than the price elasticity of demand for the good at a price of $5.
true
True or False: The closer the number representing the slope is to zero, the flatter curve will be.
true (The closer the number representing the slope is to zero, the flatter curve will be.)
When the absolute value of the price elasticity of demand is equal to one, we say that demand is ______-elastic
unit
When the absolute value of the price elasticity of demand is equal to one, we say that demand is
unit-elastic.
When demand is perfectly inelastic, the demand curve is ______.
vertical
When the quantity effect ______ the price effect, a price increase will cause a drop in revenue.
outweighs
What does the following equation show? (%ΔQAD)/(%ΔPB)
Cross-price elasticity of demand
Which of the following describes how much demand shifts due to the change in the price of another good?
Cross-price elasticity of demand
What does the following equation show? (%ΔQD)/(%ΔIncome)
Income elasticity
Which of the following describes how much demand shifts due to the change in a consumer's income?
Income elasticity
When the demand curve is relatively less elastic,
a large change in price causes a small change in the quantity demanded.
Which of the following would likely have the least elastic price elasticity of demand?
a pack of gum (If consumers spend a relatively small share of their incomes on a good, their demand for the good will be relatively less elastic.)
When demand is elastic,
a price increase causes total revenue to fall.
When the demand curve is relatively more elastic,
a small change in price causes a large change in the quantity demanded.
If income elasticity of demand is positive, the good is
normal
Demand tends to be
be more elastic when price is high and more inelastic when price is low
Elasticity is a measure of how much ______ and ______ are sensitive to price changes.
buyers (consumers) - sellers (producers)
Necessities and luxuries have income elasticities greater than zero; therefore they are ______ goods.
normal
When the price effect ______ the quantity effect, a price increase will cause an increase in revenue.
outweighs
When demand is elastic,
decrease in price will increase total revenue.
A percentage change is the
difference between the starting and ending levels divided by the starting level, expressed as a percentage.
When demand is perfectly ______, the demand curve is horizontal.
elastic
When the absolute value of the price elasticity of demand is greater than one, we say that demand is
elastic
When the price elasticity of supply is greater than one, we say that supply is ______.
elastic
Price ______ is a measure of how much consumers and producers will respond to a change in market conditions.
elasticity
The concept of _____ allows economic decision makers to anticipate how others will respond to changes in market conditions.
elasticity
The concept of ______ allows economic decision makers to anticipate how others will respond in market conditions.
elasticity
True or false: If close substitutes are available for a particular good, then the demand for that good will be less elastic than if only distant substitutes are available.
false
When the absolute value of the price elasticity of demand is less than one, we say that demand is
inelastic
For ______ inferior goods, income elasticity is negative.
inferior
The elasticity of supply, in general, depends on the elasticity of the supply of ______.
inputs (resources)
Which of the following would likely have the least elastic demand?
insulin (When a good is a basic necessity, compared to a luxury, demand will tend to be less elastic.)
The less flexible the production process, the ______ elastic the supply of the product.
less (smaller)
All else held equal, if consumers spend a relatively small share of their incomes on a good, their demand for the good will be relatively
less elastic
When a good is a basic necessity, compared to a luxury, demand will tend to be
less elastic
Goods often have more elastic demand in the ______ run that in the _____ run.
long - short
If a good has close substitutes, the demand will tend to be ______ elastic than a good with only distant substitutes.
more
All else held equal, if consumers spend a relatively large share of their incomes on a good, their demand for the good will be relatively
more elastic
The price elasticity of demand will always be a ______ number because price and quantity demanded move in ______ (same/opposite) directions.
negative - opposite
For Blank ______, Correct Unavailable goods, income elasticity is positive.
normal
