Ch 4 - Elasticity

If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then the price elasticity of demand is equal to

0.5. (The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, here −0.5/1 = −0.5. By convention, the price elasticity of demand is expressed in terms of its absolute value.)

If the price elasticity of demand for pineapples is 0.75, then a 4 percent increase in the price of pineapples will lead to a

3 percent increase in the quantity of pineapples demanded. (The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price. So, if the price elasticity of demand is 0.75 and price increases by 4 percent, then quantity demanded must fall by 3 (= 0.75 × 4) percent. Recall that price and quantity demanded move in opposite directions.)

Given that there are many different kinds of cereal that people can buy, the price elasticity of demand for any particular brand of cereal is likely to be relatively _____.

High. Demand will tend to be more elastic with respect to price for products for which close substitutes are readily available.

Total expenditure equals

PxQ (total revenue)

The elasticity of demand for a given brand of ice cream is likely to be _____ than the elasticity of demand for ice cream in general.

Since there are more substitution possibilities for a given brand of ice cream than for ice cream in general, the elasticity of demand for a given brand of ice cream is likely to be higher than the elasticity of demand for ice cream in general.

If a 6 percent decrease income leads to a 9 percent increase in the quantity of lottery tickets demanded, then the income elasticity of demand for lottery tickets is:

The income elasticity of demand is -1.5 = 9/-6.

Suppose your cousin makes cutting boards that he sells on Etsy.com. Can he increase his total revenue by increasing the price of his cutting boards?

Yes, but only if the price elasticity of demand is less than one.

If the income elasticity of demand for airplane tickets is positive, then airplane tickets are

a normal good

The elasticity of supply along any straight-line supply curve that passes through the origin is

always equal to one

If the cross-price elasticity of demand between blueberries and yogurt is negative, then the two goods are

complements (The cross-price elasticity of demand between complements is negative: an increase in the price of one will lead to a decrease in demand for the other.)

If the demand for economy-class airline tickets is elastic with respect to price, then if the price of economy-class airline tickets increases, then total expenditure will _____.

decrease. If demand is elastic with respect to price, total expenditure will decrease in response to a price increase.

If the price of sofas goes up by 10 percent and the quantity of sofas demanded falls by 15 percent, then the total expenditure on sofas will

decrease. If the percentage increase in price is less than the percentage decrease in quantity demanded, then total expenditure will decrease.

The percentage change in quantity supplied that results from a 1 percent change in price is the

elasticity of supply

When a good has many close substitutes, the price elasticity of demand tends to be relatively _____.

high

If Sal's Pizzeria uses tomato sauce, dough and cheese to make both pizza and calzones, then the price elasticity of supply for pizza at Sal's is likely to be relatively _____.

high. In general, the easier it is to shift inputs away from the production of one good towards another, the more responsive will be the quantity supplied to a change in price.

Both the supply and the demand for oil are relatively inelastic in the short-run. Thus, we would expect oil prices to be ______.

highly volatile

Suppose that there is only one small clothing store in the remote village of Green Acres, and until recently the townspeople bought their shirts there. As more people in Green Acres become connected to the Internet, the price elasticity of demand for shirts at the Green Acres store will

increase because the internet offers more substitutes. (The Internet connection provides more substitute sources of buying shirts, and goods with more substitutes have a greater price elasticity of demand.)

If the demand for first-class airline tickets is inelastic with respect to price, then if the price of first-class airline tickets increases, then total expenditure will _____.

increase. If demand is inelastic with respect to price, total expenditure will increase in response to a price increase.

The higher is the price elasticity of demand, the

more responsive the quantity demanded is to a change in price.

When the price elasticity of demand is less than 1, changes in price and changes in total expenditure

move in the same direction

If the demand for electricity is inelastic, and the local utility wants to increase its total revenue, it should _______ its price.

raise. (When demand is inelastic, total revenue increases when price increases.)

Oil and oil products remain the main fuel for cars, planes, ships, and power plants. The amount of oil still in the earth is finite. Given this information, the supply of gasoline is

relatively inelastic (supply is relatively inelastic because supply in finite)

The price elasticity of demand is

the percentage change in quantity demanded that results from a 1 percent change in price. Economists employ it to understand how supply and demand change when a product's price changes.

The cross-price elasticity of demand for popcorn with respect to the price of butter is:

the percentage change in the quantity of popcorn demanded in response to a 1 percent change in the price of butter.

The price elasticity of supply will tend to be higher when _____.

the time horizon is longer it's easy to find or produce substitute inputs

Given that there are only so many operations the world's top brain surgeon can perform every year, the price elasticity of supply for his or her services is likely to be

very low. When goods or services are produced using unique and essential inputs, the price elasticity of supply is likely to be very low.

When the price of NBA tickets is $25 each, 30,000 tickets are sold. After the price rises to $30 each, 20,000 tickets are sold. At the original price, the demand for NBA ticket is

elastic (The percentage change in quantity is 0.33 (= 10,000/30,000) and the percentage change in price is 0.2 (= $5/$25). If the percentage change in quantity demanded is greater than the percentage change in price, then the price elasticity of demand will be greater than one, implying that demand is elastic with respect to price.)

The price elasticity of demand for water will be _____ in the long run than in the short run.

higher. Over time people will figure out ways to use less water (for example, by installing low-flow shower heads), so the elasticity of demand for water will be higher in the long run than in the short run.

unit elastic

if the absolute value of its price elasticity is equal to 1

elastic

if the absolute value of its price elasticity is greater than 1

inelastic

if the absolute value of its price elasticity is less than 1

If demand is perfectly elastic with respect to price, then the price elasticity of demand is _____.

infinite

The championship game will be held next weekend in your college's 40,000-seat stadium. The supply of tickets to the game

is perfectly inelastic. (The supply of tickets is perfectly price inelastic because the supply curve is vertical at the 40,000 seat capacity. That is, a change in price cannot change quantity supplied, at least in the short run.)

Given that most people spend a relatively small share of their budget on pencils, we would expect the elasticity of demand for pencils to be relatively _____.

low. The smaller the share of people's budget an item accounts for, the lower will be the price elasticity of demand.

If the price elasticity of demand is zero, then demand is

perfectly inelastic

The price elasticity of supply for the Hope Diamond is zero because there is only one. Therefore, the supply curve for the Hope Diamond is

perfectly inelastic. (If the price elasticity of supply is zero, supply is perfectly inelastic.)

If steak is a normal good, then the income elasticity of demand for steak will be

positive

If the price elasticity of demand for wine is 1.00, then the demand for wine is _____.

unit elastic

elasticity (equation)

|% change in quantity demanded / % change in price|=|(delta Q/Q)/(delta P/P)|=|(delta Q/Q)*(P/delta P)| = |(P/Q)*(delta Q/delta P)| where (delta Q/delta P) = 1/slope of the demand curve