Economics - Exam 2 (Elasticity)
Price elasticity example: Let's assume price has increased by 50% and the quantity demanded has decreased by 20%. What is the own-price elasticity? Interpret that number.
-20/50= -0.4% For a price increase in 1%, there is a 0.4% decrease in quantity
Calculate percentage elasticity: Let's assume the price of Good X increased by 10% and the quantity demanded decreased by 5%
-5/10=-0.5 For a 1% increase in price, quantity goes down by 0.5%
If the change in price is 20% and the change in quantity demanded is 10%, what type of elasticity is present?
.1/.2= 0.5 inelastic
What could impact the elasticity?
1). availability of close substitutes 2). luxury (elastic) or necessity (inelastic) 3). what percent of your income is spent on the good 4). time since price change
Determine if it is elastic or inelastic: the price of a good falls from $3 to $2.80 and the quantity demanded increases from 105 to 125. Using the midpoint formula, what is the price elasticity of demand?
125-105/125+105 divided by 2 = 0.174 2.80-3/2.80+3 divided by 2 = -0.069 17.4/-6.9= |-2.52| = 2.52>1 = elastic
Cross-price example: Let's assume the price of hamburgers has increased from $2 to $4 which caused their demand to decrease from 100 to 50. At the same time, this caused the demand for hot dogs to increase from 25 to 125. What is the cross-price elasticity for hot dogs?
125-25/125+25 divided by 2 = 1.33 4-2/4+2 divided by 2 = 0.67 1.33/0.67 = 1.99 Substitutes
Income elasticity example: David's income has increased from $12,000 to $18,000. At the same time, the amount of pizza he buys has increased from 10 to 40 times a year. What is his income elasticity for pizza?
40-10/40+10 divided by 2 = 1.2 18000-12000/18000+12000 divided by 2 = 0.4 1.2/0.4=3 Normal
Determine if this is a substitute or a complement: Let's assume the price of milk has increased from $1 to $3 a gallon which caused their demand to decrease from 5,000 to 2,000 units per month. At the same time, this caused the demand for Cinnamon Toast Crunch to decrease from 600 to 400 units a month. What is the cross-price elasticity for Cinnamon Toast Crunch?
400-600/400+600 divided by 2 =-0.4 3-1/3+1 divided by 2 = 1 Ec+c = -0.4 complement
Price elasticity example: Let's assume the price is currently $10 with a demand of 100 units. If the price rises to $20, the new demand is 90 units. What is the price elasticity of demand for this product?
90-100/90+100 divided by 2 = -10.5 20-10/20+10 divided by 2 = 66.6 -10.5/66.6 = -0.157
What is an elastic good and equation?
An elastic good is an increase in price and a large decrease in quantity demanded |e|>1 An inelastic good is an increase in price and a small decrease in quantity demanded |e|<1
What is elasticity and the formula?
Elasticity is the measure of how responsive one variable is to a change in another variable. The formula is elasticity = percent change in quantity/percent change in variable
Examples of inelastic:
Gas, toilet paper, medicine, water, food, electricity
What is income elasticity of demand and the formula?
It is a measure of how responsive demand is to a change in consumer income. Ei= percent change in quantity/percent change in income
What is cross price elasticity and the formula?
It is a measure of the effect of a change in the price of one product on the quantity demanded of another Formula: Ec= percent change in quantity of good 1/percent change in price 2
Examples of elastic:
Juice, TV, shoes, graphics card
What is income elasticity?
Measures change in a quantity with a change in income
What is cross price elasticity?
Measures change in quantity with a change in another good's price
What are the income elasticity of demand types?
Normal: goods, services, and resources that are consumed more when income increases (positive) Inferior: goods, services, or resources that are used or consumed less when income increases (negative)
Impacts on total revenue - elastic
Price goes down, loss from lower price < benefit from selling more units, price and total revenue move in opposite directions
Impacts on total revenue - inelastic
Price goes up, benefit from higher price > loss from selling fewer units, price and total revenue move in same direction
What are substitutes and what is the equation?
Substitutes are goods, services, or resources that are viewed as replacements for one another Ec>0 positive Complements Ec<0 negative
What is price elasticity of demand?
This is also known as own-price elasticity, which measures change in quantity with a change in own price
Calculate elasticity using midpoint formula: Let's assume quantity is originally 20 and changes to 25, and price is originally 10 and changes to 9.
change in quantity: 25-20/25+20 divided by 2 = 22.2% change in price: 9-10/9+10 divided by 2 = -10.5% = 22.2/-10.52 = -2.1% For a 1% increase in price, quantity decreases by 2.1%
If the price elasticity of demand for a product is _________, it is considered elastic.
greater than 1
Impacts on total revenue - unitary
no impact
