Elasticity

How do we express this using the variables P1 (original price) and P2 (new price)? A. P2−P1(P2+P1)÷2×100 B. P2−P1(P2+P1)×100 C. P1−P22×100

A. P2−P1(P2+P1)÷2×100

Let's look at the first part of the formula. How do we find the percentage change in quantity using the midpoint formula? A. The change in quantity divided by the average quantity, multiplied by 100. B. The change in quantity multiplied by the average quantity. C. The average quantity divided by the change in quantity, multiplied by 2.

A. The change in quantity divided by the average quantity, multiplied by 100.

A perfectly elastic supply curve is A. horizontal. B. upward sloping to the right. C. vertical.

A. horizontal.

When income increases and demand for a good falls, the good is considered a A. inferior good. B. normal good. C. complementary good.

A. inferior good.

Law of Demand

As price increases, quantity demanded decreases.

Which of the following questions would be asked by an economist studying elasticity? A. How will consumers behavior change with a technological innovation? B. How responsive are consumers and producers to changes in price? C. What quantity should producers sell to maximize profits?

B. How responsive are consumers and producers to changes in price?

Elasticity

A measure of how much one economic variable responds to changes in another economic variable.

Infinite or perfect elasticity

quantity demanded or supplied changes to an infinite amount in response to any change in price.

Price elasticity of demand changes at different point on a ____.

straight-line demand curve.

More luxurious the product

the more elastic demand because it doesn't fulfill a critical need.

Elasticity of savings

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

Zero inelasticity on a demand/supply curve is

vertical.

When a 10% increase in income causes a 4% increase in quantity demanded of a good A. the price elasticity of demand is .4 and the good is an inferior good. B. the income elasticity of a good is 2.5 and the good is a normal good. C. the income elasticity of a good is .4 and the good is a normal good.

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

Growth rate method

Change in Q demanded/Average of the two quantities demanded Equation: (Q2-Q1)/[(Q2+Q1)/2]

Straight-line demand curve

Price elasticity of demand grows steadily more inelastic as you move from left to right.

Cross-price elasticity of demand

a change in price of one good can shift the quantity demanded for another good.

Zero/perfect inelasticity

any % change in price will result in zero changes in quantity supplied or demanded.

Infinite or perfect elastic supply

any change in price will result in an infinite amount of change in quantity.

More substitutes

elastic demand

Inferior goods are

goods that consumers demand less of when their incomes increase. an increase in income will decrease the quantity demanded.

Normal goods are

goods that consumers demand more of when their incomes increase. an increase in income will increase the quantity demanded.

Infinite/perfect elasticity on a demand curve is

horizontal

Are traditional textbooks elastic or inelastic?

inelastic because an instructor assigns the textbook and there are no substitutes that ensure the same content and must buy it at any price.

Are medical procedures elastic or inelastic?

inelastic because the patient will pay what they can or must for their health care.

10% increase in price will result in 4.5% decrease in quantity demanded. 10% decrease in price will result in 4.5% increase in quantity demanded.

inelastic demand

Fewer substitutes

inelastic demand

Is gasoline elastic or inelastic?

inelastic, especially in the short-run. In the long-run more options are available like buying a fuel efficient vehicle or working closer to home.

Price Elasticity of Demand

measures the responsiveness of quantity demanded to a change in price.

Greater necessity of the product

more inelastic demand because of limited substitutes.

Inelastic

- A large change in price causes a very small change in the quantity demanded. - Consumers are insensitive to changes in prices.

Elastic

- A small change in price produces a large change in demand. - Demand is very sensitive to change in price.

Quantity supplied depends on

-Cost of production -Changes in weather (natural conditions) -New technologies -Government policies

Quantity demanded depends on

-Income -Tastes and preferences -Population -Expectations of future prices -Prices of related goods

Positive cross-price elasticity of demand

Substitutes (As the Price of one good increases, the Demand for the second good increases) The 2 goods are in Competitive Demand.

Using the mid-point method: Suppose the quantity demanded of a product was 100 at one point on the DC, then it moved to 103 at another point. What is the % change in quantity demanded?

= 103-100/(103+100)/2 =3/101.5 =0.0296 =2.96% change in quantity demanded.

Is gas from a particular station elastic or inelastic?

elastic because buyers can compare prices and use another gas station. There are many gas stations in a small area giving it more substitutes.

Are airline tickets elastic or inelastic?

elastic because they have substitutes with other airlines or buyers can choose to use alternative travel such as car or train.

More producers of the same product

elastic demand because consumers can find substitutes.

Only one producer

inelastic demand because there are no substitutes.

Long-run

more price elastic because they have greater opportunity to find substitutes.

Short-run

more price inelastic because they don't have time to find substitutes.

Perfectly elastic demand

quantity demanded will infinitely increase when the price decreased and quantity demanded will decrease to zero when prices increase. "All or nothing"

Product takes large share of consumer budget

the more price elastic of demand. A small change in price can have a large effect on demand.

Product takes small share of consumer budget

the more price inelastic demand. A large change in price will have a small effect on demand.

Income elasticity of demand

the percent change in the quantity demanded divided by the percent change in the income.

Wage elasticity of labor supply

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

Cross-price elasticity of demand calculation

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

How do we express the percentage change in quantity using the variables Q1 (original quantity) and Q2 (new quantity)? A. Q2−Q1(Q2+Q1)÷2×100 B. Q2−Q1(Q2+Q1)×100 C. Q1−Q22×100

A. Q2−Q1(Q2+Q1)÷2×100

Now let's look at the second part of the formula. How do we find the percentage change in price using the midpoint formula? A. The change in price divided by the average price, multiplied by 100. B. The change in price multiplied by the average price. C. The average price divided by the change in price, multiplied by 2.

A. The change in price divided by the average price, multiplied by 100.

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). A. The price elasticity of demand for good Z = 0.86. B. The price elasticity of demand for good Z = 1.90. C. The price elasticity of demand for good Z = 0.52.

A. The price elasticity of demand for good Z = 0.86.

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 A. demand for drinks and food is elastic. B. demand for drinks and good is perfectly inelastic. C. demand for drinks and good is inelastic.

A. demand for drinks and food is elastic.

Elastic supply occurs if the change in quantity supplied is ___ to a change in price. A. relatively responsive B. the same C. relatively unresponsive

A. relatively responsive

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? A. Keep the price the same. B. Lower the price. C. Raise the price.

B. Lower the price.

Given that total revenue = price x quantity, what will happen to total revenue if price increases when demand is elastic? A. It will increase. B. It will stay the same. C. It will decrease.

C. It will decrease.

When the local grocery store puts peanut butter on sale, reducing its price from $4.30 per item to $3.90 per item, the quantity sold increases from 210 per week to 230 per week. This response illustrates which of the following concepts? A. Price elasticity of supply. B. Income elasticity of demand. C. Price elasticity of demand. D. Cross-price elasticity of demand.

C. Price elasticity of demand.

Which of the following factors does NOT influence the price elasticity of demand of a product? A. Short run versus long run. B. Share of the consumer budget. C. Slope of the supply curve.

C. Slope of the supply curve.

What does the price elasticity of demand represent? A. The percentage change in quantity supplied divided by the percentage change in price. B. The percentage change in quantity demanded divided by the percentage change in income. C. The percentage change in quantity demanded divided by the percentage change in price. D. The percentage change in the quantity of a good A that is demanded as a result of a percentage change in the price of good B.

C. The percentage change in quantity demanded divided by the percentage change in price.

Negative cross-price elasticity of demand between two goods indicates that the two goods are A. substitutes. B. inferior goods. C. complements.

C. complements.

Elasticity allows economists to measure A. the frequency of shifts in demand. B. how firms can maximize profits. C. the responsiveness of one variable to changes in another variable.

C. the responsiveness of one variable to changes in another variable.

Negative cross-price elasticity of demand

Complements (As the Price of one good increases, the Demand for the second good decreases) The 2 goods are in Joint Demand.

Suppose a job pays $10 per hour and a worker is given a $2 per hour raise. What is the % change in pay?

$2/$10 = .20 or 20%

Formula for growth rate calculation

% change = change in Q/Q

Price elasticity of demand equation

% change in quantity demanded / % change in price

Price elasticity of supply

% change in quantity supplied / % change in price

Mid-point method for elasticity equation

(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]