Unit 1 Elasticity

growth rate

percentage change: the change in quantity divided by the quantity

Influences the price elasticity of demand

short run vs long run and share of the consumer budget

When a 10% increase in income causes a 4% increase in quantity demanded of a good

the income elasticity is .4 and the good is a normal good

The elasticity of supply formula

the percentage change in quantity divided by the percentage change in price

total revenue

the price of an item multiplied by the number of units sold

elasticity

the responsiveness of one variable to changes in another variable

Which of the following questions would be asked by an economist studying elasticity?

How responsive are consumers and producers to changes in price

If the elasticity of demand for a company's product is estimated to be 1.72, the company should do what to increase revenue?

Lower the price

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

The demand for drinks and food is elastic

If consumers find cola and iced tea to be substitute goods, then it is likely that

The goods' cross-price elasticities are greater than zero

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3. Select the statement that best describes the results of raising the fare in the short run.

Total revenue rises immediately after fare increase, since demand over the immediate period is price inelastic

inferior good

a good for which the quantity demanded falls as income rises, and the quantity demanded rises as income falls; income elasticity of demand for an inferior good is negative

normal good

a good for which the quantity demanded rises as income rises, and the quantity demanded falls as income falls; income elasticity of demand for a normal good is positive

Determining the price elasticity of demand involves

availability of substitutes and luxuries vs necessitites

The size of the change in the quantity demanded of a good or service is due to change in its price is measured by the elasticity of demand

change in its price is measured by the elasticity of demand

Negative cross-price elasticity of demand between two goods indicates that the two goods are

complements

Suppose the price of apples increase by 20%, resulting in consumers to purchase 15% more pears. Given this information, it appears that

cross-price elasticity of pears is 0.75

A perfectly elastic supply curve is

horizontal

Complements

negative cross-price elasticity of demand between two goods indicates that the two goods are __________

Given that total revenue = price x quantity, what will happen to total revenue if price increases when demand is elastic?

It will decrease

Suppose there is a major technological advance in the production of a good that causes production costs to fall. If demand for the product is relatively inelastic, what will happen in the market?

Price will relatively decrease greater than the increase in quantity.

Using the midpoints method, calculate the price elasticity of demand of Good X using the following information: When the price of good X is $50, the quantity demanded of good X is 400 units. When the price of good X rises to $60, the quantity demanded of good X falls to 300 units

The price elasticity of demand for good X = 1.57.

Using the midpoints method, calculate the price elasticity of demand of Good Z using the following information: When the price of good Z is $10 (P1), the quantity demanded of good Z is 85 units (Q1). When the price of good Z rises to $15 (P2), the quantity demanded of good Z falls to 60 units (Q2).

The price elasticity of demand for good Z = 0.86.

A smoker who is willing to pay whatever it takes to support a smoking habit likely has ________ demand.

inelastic

Demand is ________ if a large change in price causes a small change in demand

inelastic

A person who takes life-saving prescription drugs most likely has a(n) ________demand for that drug. Therefore an increase in the price of the drug will result in ________ total revenue for the drug company.

inelastic; increased

The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is less than the percentage change in price, the demand for that good or service is ________ and price elasticity is ________.

inelastic; less than 1

When income increases and demand for a good falls, the good is considered a

inferior good

infinite elasticity

infinite elasticity the extremely elastic situation of demand or supply in which the quantity changes by an infinite amount in response to any change in price; also called perfect elasticity

price elasticity of supply

percentage change in the quantity of a good or service supplied divided by the percentage change in price

The elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in

price

Elastic supply occurs if the change in quantity supplied is ________ to a change in price

relatively responsive

The price elasticity of demand measures the

responsiveness of quantity demanded to a change in price

Determining the price elasticity of demand DOES NOT involve

slope of the supply curve

zero elasticity

the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; also called perfect inelasticity

unitary elasticity

when the calculated elasticity is equal to 1, indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied

elastic demand

when the elasticity of demand is greater than 1, indicating a high responsiveness of quantity demanded to changes in price

inelastic demand

when the elasticity of demand is smaller than 1, indicating a low responsiveness of quantity demanded price changes

elastic supply

when the elasticity of supply is greater than 1, indicating a high responsiveness of quantity supplied to changes in price

inelastic supply

when the elasticity of supply is smaller than 1, indicating a low responsiveness of quantity supplied to price changes

If the supply curve for a product is horizontal, then the elasticity of supply is

equal to infinity

If the elasticity of demand for a company's product is estimated to be 1.72, what would you advise the company to do if their objective is to increase revenue?

lower the price

price elasticity of demand

percentage change in the quantity of a good or service demanded divided by the percentage change in price

The elasticity of supply is defined as the ________ change in quantity supplied divided by the ________ change in price.

percentage; percentage

When a 5% increase in income causes a 3% drop in quantity demanded of a good

the income elasticty is.6 and the good is an inferior good

demand is more price elastic in

the long run than in the short run

wage elasticity of labor supply

the percentage change in hours worked divided by the percentage change in wages

income elasticity of demand

the percentage change in quantity demanded divided by the percentage change in income

cross-price elasticity of demand

the percentage change in the quantity of good A that is demanded as a result of a percentage change in the quantity of good B demanded

elasticity of savings

the percentage change in the quantity of savings divided by the percentage change in interest rates

price elasticity

the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied

constant unitary elasticity

when a given percentage change in price leads to an equal percentage change in quantity demanded or supplied

In a market with relatively inelastic demand, if the supply curve shifts due to a fall in production costs, the equilibrium price will ________ by ________ than equilibrium quantity

decrease; more

If a small change in price creates a large change in demand, then we would say that the demand is

elastic

The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is more than the percentage change in price, the demand for that good or service is ________ and price elasticity is ________.

elastic, greater than 1

Elasticity measures the behavioral response of economic agents in a given situation. A question is likely to be answered using elasticity is:

If a business puts an item on sale, will the additional number sold offset the discount of each item

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand, several years after the price change, will be about −1.5. The result of raising the fare in the long run should

Total revenue rises immediately after the fare increase since demand over the immediate period is price inelastic?