Microeconomics Unit 2 (Hirascau)

Price elasticity of supply

% change in quantity supplied / % change in price

Cross-price elasticity of demand Question: Scenario: If raising the price of raspberries 8% leads to an increase in demand for blueberries by 12%, then the cross-price elasticity of demand for blueberries (with respect to the price of raspberries) Solve:

%ΔQ Blueberries / %ΔP Rasberries = 12%/8% = 1.5

What is a Market:

A setting that brings together potential buyers and sellers

3. Decrease in Demand and Increase in Supply What happens to price and quantity when supply shift is big, and demand shift is small?

Price goes down Quantity goes to the right

4. Decrease in Both Demand and Supply What happens to price and quantity when supply shift is big, and demand shift is small?

Price goes up Quantity goes left

What is not a shift in demand?

Price?

At the market equilibrium, supply and demand are __ __, such that there

in balance, is no shortage or surplus

Easy entry and exit make supply more elastic: Market supply will be

more elastic when it is easier for businesses to enter or exit a market.

If the market demand curve shifts, then the market

moves to a new equilibrium

Income elasticities between 0 and 1 are

necessities

Complements have a __ cross-price elasticity of demand

negative

If the market supply curve shifts, then the market moves to a

new equilibrium

Luxuries have what type of demand?

relatively elastic demand.

Elastic demand curves are __ __, while inelastic demand curves are __ __

relatively flat, relatively steep

Shifts in demand cause price and quantity to move in the

same direction

Necessities have less elastic demand idea:

Things that you can't do without are things that you will keep buying even as the price rises

Take-away from this idea:

Those who are most willing to search will be more responsive to price changes (more elastic)

Bakery Scenario: If you sell 60 brownies at a price of $2.25, how much revenue do you have? You collect $2.25 for each of the 60 brownies you sell Solve:

Total revenue = P x Q = $2.25 x 60 = $135

For inferior goods, the change in demand for good X goes

goes in the opposite direction as the change in income

For normal goods, the change in demand for good X

goes in the same direction as the change in income.

Elastic: The absolute value of the price elasticity is

greater than 1.

The __ __ __ __ can cause a different change in quantity, depending on

same change in price, the elasticity

In easily available variable inputs make supply elastic: What happens with sellers?

sellers have the flexibility to respond to price changes

Relatively steep supply curve is

Inelastic

This is what kind of demand?

Inelastic Demand

Increase in demand and increase in supply Total effect: Effect on equilibrium price: Total effect: Effect on equilibrium Quantity:

It depends (↑P + ↓P) Rises (↑Q + ↑Q)

Decrease in demand and decrease in supply Total effect: Effect on equilibrium price: Total effect: Effect on equilibrium Quantity:

It depends (↓P + ↑P) Falls (↓Q + ↓Q)

Example of elastic supply

Landscaping Example: You can easily hire more workers and buy more lawncare supplies when prices of landscaping services rise — elastic supply

This also means that they are

More likely to find an acceptable, lower-priced substitute!

Things to go back to ?

Page 8 of slides Page 9 of slides Chapter 5: Page 5 Page 7 Page 34 Page 37 Page 42 equation

Vertical supply curve is

Perfectly Inelastic

Necessities have less elastic demand example

Prescription drugs are necessity — it is not a good option to forgo buying something your doctor prescribes, and there are likely no close substitutes.

Percentage change in quantity demanded =

Price elasticity of demand ´ percentage change in price

4. Decrease in Both Demand and Supply What happens to price and quantity when demand shift is big, and supply shift is small?

Price goes down Quantity goes left

3. Decrease in Demand and Increase in Supply What happens to price and quantity when demand shift is big, and supply shift is small?

Price goes down Quantity goes to the left

1. Increase in Both Supply and Demand What happens to price and quantity when Supply shift is big, and demand shift is small?

Price goes down Quantity goes to the right

A change in price leads to a

change in quantity demanded in the opposite direction

An increase in price will only cause revenue to rise if...

% change in price is larger than % change in quantity

Underlying structure of all elasticity formulas:

% Change in quantity / % Change in some factor

Cross-price elasticity of demand formula:

% Change in quantity demanded / % Change in price of another good

Relatively steep demand curve means

Inelastic

These questions form part of the?

Organization Options

Example:

Restaurant meals

Less than 1 is

inelastic

A surplus pushes

the price down

A decrease in price will only cause revenue to rise if...

% change in price is smaller than % change in quantity

Whenever you are solving elasticity. Does the starting amount of money matter or does the percent change in quantity matter?

% change in quantity

Price elasticity of demand =

% change in quantity demanded % change in price

Income elasticity of demand =

% change in quantity demanded / % change in income

Your income rises by 10% and you buy 16% more restaurant meals, then your income elasticity of demand for restaurant meals is Solve

%ΔQ Resturant Meals / %Δ Income =16%/10% = 1.6

Scenario: If raising the price of donuts 12% leads to a rise in quantity supplied by 16%, then the price elasticity of supply for donuts is Solve: Implication:

%ΔQ/%ΔP = 16%/12% = 1.33 The price elasticity of supply is a positive number (of course!)

Scenario: The price elasticity of demand for strawberries is -0.8. If the price of strawberries were to rise by 15%, by how much will the quantity of strawberries demanded fall? Solve on paper

%∆Q = Price elasticity of demand %∆P %∆Q = -0.8 15% %∆Q = -12% The quantity of strawberries demanded will fall by 12%.

Shorthand equivalent formula:

%∆Q = Price elasticity of demand x %∆P

What is the absolute value of price elasticity when the toll rate decreases from $8 to $6? How to find change in total revenue? Toll Rate Number of Vehicles using the Toll Everyday $8 10,000 $6 12,000

(𝑄2−𝑄1)/(𝑄2+𝑄1)/2×100/(𝑃2−𝑃1)/(𝑃2+𝑃1)/2×100|||||||| AB value: 0.64 8x10,000 = 80000 6x12,000 = 72000 72000-80000 = -8000

When there is a horizontal demand curve, what three things take place?

1. % change in quantity is infinite for any % change in price 2. The quantity demanded is infinitely responsive to a change in price 3. price E of D = ∞

Cross-price elasticity of demand practice Scenario 1: The price of cereal goes up 10%, and the demand for milk falls by 6%. What is the cross-price elasticity of demand for cereal? Solve: Interpretation:

-6% demand for milk / 10% price of cereal = -0.6 The negative sign tells us that cereal and milk are complements

Cross-price elasticity of demand practice Scenario 3: The price of sweaters goes up by 15%, and the demand for iPhones remains unchanged. What is the cross-price elasticity? Solve: Interpretation:

0% demand for iphones / 15% price of sweaters = 0 Sweaters and iPhones are unrelated goods. Having a sweater doesn't make you more or less likely to have an iPhone.

At the current $4 price, suppliers have __ of unsold gas.

0.9 gallons

Demand is inelastic when price elasticity is less than __, which indicates. Demand changes __ than price changes, and quantity demanded changes __ .

1, less, less

Horizontal supply curve indicates what three things?

1. % change in quantity is infinite for any % change in price 2. The quantity supply is infinitely responsive to a change in price: 3. price E of S = ∞

When there is a relatively flat demand curve what three things take place?

1. % change in quantity is larger than % change in price 2. The quantity demanded is relatively responsive to a change in price 3. price E of D > 1

Relatively flat supply curve indicates what three things?

1. % change in quantity is larger than % change in price 2. The quantity supplied is relatively responsive to a change in price: 3. price E of S > 1

When there is a relatively steep demand curve what three things take place?

1. % change in quantity is smaller than % change in price 2. The quantity demanded is relatively unresponsive to a change in price 3. price E of D < 1

Relatively steep supply curve indicates what three things?

1. % change in quantity is smaller than % change in price 2. The quantity supplied is relatively unresponsive to a change in price: 3. price E of S < 1

When there is a vertical demand curve what three things take place?

1. % change in quantity is zero for any % change in price 2. The quantity demanded is unchanged for any change in price 3. price E of D = 0

Vertical supply curve indicates what three things?

1. % change in quantity is zero for any % change in price 2. The quantity supplied is unchanged for any change in price: 3. price E of S = 0

The falling price has two effects: what are they?

1. As the price falls, the quantity demanded rises (law of demand). 2. As the price falls, the quantity supplied falls (law of supply)

What two things happen when both curves shift

1. Demand shift is big, and supply shift is small 2. Supply shift is big, and demand shift is small

Two examples of More competing products means greater elasticity.

1. Grocery Store Example: If the price of one pasta brand doubles, you might buy a different pasta brand instead. 2. Airline Example: Demand is more elastic for shorter flights, for which driving is a reasonable substitute.

2 examples of being a demander

1. If you are shopping on Etsy and decide to buy something, then you are a demander in the hand-made crafts market. 2. If you book a room on Airbnb, then you are a demander in the online rental lodging market.

2 Examples of being a supplier?

1. If you have an Etsy shop, then you are a producer who supplies their product in the hand-made crafts market 2. If you list your apartment on Airbnb, you are a supplier in the online rental lodging market.

6 demand shifters

1. Income (normal & inferior) 2. Preferences 3. Prices of complements and substitutes 4. Expectations about the future 5. Congestion and network effects 6. The type and number of buyer

5 supply shifters?

1. Input prices 2. Productivity and technology 3. Other opportunities and the prices of related outputs 4. Expectations about the future 5. The type and number of sellers

Determinants of the price elasticity of supply (5)

1. Inventories make supply more elastic. 2. Easily available variable inputs make supply elastic. 3. Extra capacity makes supply elastic. 4. Easy entry and exit make supply more elastic. 5. Over time, supply becomes more elastic

5 Determinants of the Price Elasticity of Demand

1. More competing products mean greater elasticity. 2. Specific brands tend to have more elastic demand than categories of goods. 3. Necessities have less elastic demand. 4. Consumer search makes demand more elastic. 5. Demand gets more elastic over time.

If something is a necssity and the price changes, the quantity demanded would either? (2)

1. Not change 2. It will decrease by less than the % change in price

Two parts of Organization Options?

1. Planned Economy 2.Market Economy

Extra capacity makes supply elastic (Example of Elastic Supply)

1. Restaurant Example 1: If a restaurant has a larger kitchen than it needs, then this extra capacity provides flexibility. 2. If prices rise, then use this extra capacity to increase meal production. 3. Result: elastic supply

Extra capacity makes supply elastic (Example of Inelastic Supply)

1. Restaurant Example 2: If a restaurant is already using its kitchen at full capacity, then it will be harder to increase production. 2. Result: inelastic supply

Inventories make supply more elastic: What happens when supply is elastic for sellers? (2 things)

1. Sellers can respond rapidly to price changes. 2. Sellers have the flexibility to adjust the quantity supplied to the market as the price changes

Two types of inventories and examples for each

1. Storable Products: gasoline 2. Non-storable products: baked goods

What three questions are asked when we organize society?

1. What goods get produced? 2. Who will produce these goods and how will they do it? 3. How will you allocate these goods? In other words, who gets what?

Price elasticity of demand calculation recipe (3)

1. What was the percentage change in price (as calculated by the midpoint formula)? 2. How much did the quantity demanded change as a percent, in response (as calculated by the midpoint formula)? 3. Calculate the elasticity (using values from steps 1 and 2)

(Calculate the Price Elasticity of Demand): Bakery Scenario: The price of fudge brownies at your local bakery rose from $1.50 to $2.25. As a result, the quantity of brownies purchased drop from 72 to 60 brownies per day. Calculate the absolute value of the price elasticity of demand for brownies. Three steps in solving it:

1. What was the percentage change in price (as calculated by the midpoint formula)? 2. How much did the quantity demanded change as a percent, in response (as calculated by the midpoint formula)? 3. Calculate the elasticity.

If prices stay up, then, over time. What two things should you do?

1. expand production or capacity by building a new factory. 2. bigger response to price changes

In over time, supply becomes more elastic: If prices rise today what two things will take place?

1. most sellers rely on their stockpiled inventories to increase the quantity supplied that same day. 2. limited ability to respond to price changes

The supply and demand framework can be used to do what? (2)

1. predict market outcomes when market conditions change 2 diagnose market outcomes you see in the news or happening around you

In Inventories make supply more elastic: If your product is easily stored, then what two things take place?

1. stockpile your product if prices are low. 2. dial up supply by selling stored inventories when the prices are high

The five determinants of price elasticity of supply are

1. the ability to store inventory, 2. the availability of inputs, 3. the availability of extra capacity, 4. the ease of entry to or exit from the market 5. the length of time to adjust supply.

A completely vertical demand curve means what two things?

1. the price elasticity of demand is zero — no matter what the change in price 2. the total quantity demanded is unchanged

The price stops falling when it hits $__, the point at which

2, Qd equals Qs once again.

But, when quantity goes from 150 to 100, it's a

33% decrease

The price stops rising when it hits $__, the point at which

4, Qd equals Qs once again.

When quantity goes from 100 to 150, it's a

50% increase

Cross-price elasticity of demand practice Scenario 2: The price of cookies goes up 5% and the demand for candy rises by 7%. What is the cross-price elasticity of demand for candy? Solve: Interpretation:

7% Demand for candy / 5% price of cookies = 1.4 The positive sign tells us that cookies and candy are substitutes.

Equilibrium Price:

: The price at which the market is in equilibrium

In equilibrium: What law is there to every buyer and seller?

Buyer: Every buyer who wants to buy an item can find a seller Seller: Every seller who wants to sell an item can find a buyer

Inelastic demand:

Buyers are not very responsive to price, so the quantity demanded rises only a little.

Elastic demand:

Buyers are very responsive to price, so the quantity demanded rises by a lot

2. Increase in Demand and Decrease in Supply What happens to price and quantity when supply shift is big, and demand shift is small?

Price goes up Quantity goes to the left

Price elasticity of demand:

A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change

Price elasticity of supply:

A measure of how responsive sellers are to price changes.

Income elasticity of demand:

A measure of how responsive the demand for a good is to changes in income

Cross-price elasticity of demand:

A measure of how responsive the demand of one good is to price changes of another

Scenario 1: The proliferation of electronic book readers (the Kindle) led to a rise in the quantity of books sold while the average price of a book fell. Question: What do these changes in quantity and price tell us about how e - books changed the publishing market?

Answer: Because price and quantity moved in opposite directions, the supply curve must have increased

Scenario 2: On Valentine's Day the price of roses rises, as does the quantity sold. Question: What do these changes in quantity and price tell us about the rose market on Valentine's Day?

Answer: Because price and quantity moved in same directions, the demand curve must have increased

Good and Bad strategies regarding the Law of Demand

Bad: If cutting prices only leads to a few new sales, then it was a bad strategy Good: If cutting prices leads to a lot more sales, then it was a good strategy

Example of Specific brands tend to have more elastic demand than categories of goods and three things that complement it.

Cereal Example: There are many substitutes for Honey Nut Cheerios 1. so if the price goes up 2. buyers simply switch to a different breakfast cereal 3. Result: Demand for Honey Nut Cheerios is quite elastic

These past three cards are examples of what determinant?

Consumer search makes demand more elastic.

Relatively flat demand curve means

Elastic

Relatively flat supply curve is

Elastic

Cross Price Elasticity of Demand formula

Ex,y = (%change Qd good X) / (%change Price good Y)

The Marriage Market example

If you are dating with the intention of marriage, then you are participating in the marriage market. You are considering what this person offers in terms of personality, finance, etc., and trying to decide whether to get married (i.e., make the purchase)

Example of being a seller?

If you own a coffee shop, then you are a producer (seller) in the coffee market.

2. Increase in Demand and Decrease in Supply What happens to price and quantity when Demand shift is big, and supply shift is small?

Price goes up Quantity goes to the right

1. Increase in Both Supply and Demand What happens to price and quantity when Demand shift is big, and supply shift is small?

Price goes up Quantity goes to the right

In the mid-1980s Howard Schultz noticed most coffee sellers were following a low-price strategy, selling cheap coffee. Schultz believed many coffee drinkers would be willing to pay higher prices for better quality coffee... and Starbucks was created Where has Starbucks opened stores?

In markets where coffee drinkers are not going to be deterred by higher prices

Decrease in demand and increase in supply Total effect: Effect on equilibrium price: Total effect: Effect on equilibrium Quantity:

Falls (↓P + ↓P) It depends (↓Q + ↑Q)

Price Matching vs Price Setting

Price matching is a strategy used by retailers to match the prices of competitors' products if a customer finds it for a cheaper price elsewhere. Price Setting is the process/procedure firms are following for setting the price.

The price stops falling when it hits $2, the point at which

Qd equals Qs once again.

Increase in demand and decrease in supply Total effect: Effect on equilibrium price: Total effect: Effect on equilibrium Quantity:

Rises (↑P + ↑P) It depends (↑Q + ↓Q)

2 rules in interpreting market demand

Rule 1 If prices and quantities move in the same direction, then the demand curve has definitely shifted. • (It's possible that the supply curve may also have shifted.) Rule 2 If price and quantities move in opposite directions, then the supply curve has definitely shifted. • (It's possible that the demand curve may also have shifted.)

Example:

Shopping at Goodwill

Equilibriums, shortages, surpluses lead the price to rise and Equilibriums, shortages, surpluses lead the price to fall

Shortages, Surpluses

Scenario: A major retailer announces plans to install charging stations for electric cars in 400 parking spaces in 120 cities. (increase in demand) 3 steps when predicting market outcomes.

Step 1: Buyers of electric cars will have greater access to charging stations, so the convenience of owning an electric car will be higher. This impacts people's demand for electric cars. Step 2: Increased convenience will increase demand for electric cars, shifting the demand curve to the right. (shifter: preferences) Step 3: At the new equilibrium, we will have an increase in both prices and quantity of electric vehicles.

Scenario: Amazon announces it is developing technology to deliver orders within 30 minutes. Owners of local stores wonder how their sales will be affected (decrease in demand) 3 steps when predicting market outcomes

Step 1: People who buy from local stores will have a close substitute for buying goods quickly. This impacts the customers' demand for local goods. Step 2: Customers are now less likely to buy from local stores, shifting the demand curve to the left. (shifter: preferences) Step Step 3: At the new equilibrium, we will have a decrease in both prices and quantity of goods bought from local stores.

Scenario: Due to a drought in California, farmers face rising water costs. Almond farming is a water-intensive process. How will the drought affect the market for almonds? (decreased supply) 3 steps when predicting market outcomes

Step 1: The drought will affect the farmers' marginal cost of producing almonds. This impacts the almond supply curve. Step 2: The water shortage increases the farmers' marginal costs of production, leading to a decrease in supply. The supply curve shifts to the left. (shifter: input prices) Step 3: At the new equilibrium, we will have higher almond prices and a lower quantity of almonds sold

Scenario: The federal government announces plans to fund research that will lower the cost of batteries used in electric cars. (increased supply) 3 steps when predicting market outcomes

Step 1: The new technology will affect the seller's marginal cost of producing each electric car. This impacts the supply of electric cars. Step 2: Cheaper batteries reduce the cost of production. Lower marginal costs lead to an increase in supply, shifting the supply curve to the right. (shifter: input prices) Step 3: At the new equilibrium, we will have a decrease in prices and a higher quantity of electric cars sold

Elastic demand:

The quantity demanded is relatively responsive to a change in price, so when the price falls, the quantity demanded rises a lot in response to the price cut (i.e., extra sales make up for the price cut).

Inelastic demand:

The quantity demanded is relatively unresponsive to a change in price, so when the price rises, the quantity demanded does not fall by much

Total revenue:

The total amount you receive from buyers, which is calculated as price x quantity (P X Q IS THE FORMULA)

Exceptions Idea

There are two extreme cases for which the elasticity does not change

The sign of the income elasticity of demand indicates whether the good is

normal or inferior

wine and cheese, shoes and sandals, shampoo and conditioner, peanut butter and lumber. beef and chicken. tables and chairs Which are Independent, Substitutes, or Complements?

Substitutes: Shoes and Sandals Beef and chicken Independent: Peanut butter and lumber Complements: wine and cheese tables and chairs shampoo and conditioner

Law of Demand

Tells us that when the price falls, the quantity demanded will rise

Equilibrium:

The point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded.

Where is surplus within a market equilibrium graph?

The price that is above the v part of the x (within)

Where is shortage within a market equilibrium graph?

The price that is below the upside down v of the x (within)

Equilibrium Quantity:

The quantity demanded and supplied in equilibrium.

When there is market equilibrium what happens?

The quantity demanded equals the quantity supplied.

Example of Demand gets more elastic over time

Travel Example: You are planning a trip to Hawaii sometime for the upcoming year. You have plenty of time to watch plane ticket prices and get the best deal.

Example of inelastic supply

Vehicle Example: If microprocessors (chips) are not readily available, then car suppliers cannot easily produce more cars even when prices are high — inelastic supply.

Planned Economy: Centralized decisions are made about

What is produced, how, by whom, and who gets what

Perfectly elastic:

When any change in price leads to an infinitely large change in quantity

Perfectly inelastic:

When quantity does not respond at all to price changes

Elastic:

When suppliers can increase the quantity supplied in response to higher prices.

Inelastic:

When suppliers cannot increase the quantity supplied by much in response to higher prices.

Elastic

When the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price

Inelastic

When the absolute value of the percent change in quantity is smaller than the absolute value of the percent change in price

Is price a shifter in supply?

Yes. jk hell no

Example of necessities

You have to buy toilet paper, and if your income goes up, you aren't going to buy that much more

Result:

You will be more price sensitive (have more elastic demand)

What important insights does this entail? (select all that apply) a. with linear demand curves, elasticity will eventually will differ as you move along a curve. b. elasticity measures responsiveness in percent change, which is different than slope. c. elasticity is unitary along a linear demand curve d. elasticity is constant along a linear demand curve

a and b

Why does this total decrease occur (multiple selections) a. customers are very responsive to price changes and switching to viable alternatives to the product b. Customers are less responsive to price changes due to the lack of viable alternatives to the product c. the percent increase in price outweighs the percent decrease in quantity demanded d. The percent decrease in quantity demanded outweighs the percent increase in price

a and d

The more competing products there are, the more likely you'll be able to find

a close substitute.

Because demand increased, at the original $3 price there is now

a shortage

Because demand decreased, at the original $3 price there is now

a surplus

Because supply increased, at the original $3 price there is now

a surplus.

If a market is not in equilibrium what takes place? a. supply changes to bring demand into balance b. demand changes to bring supply into balance c. price changes to bring supply and demand into balance d. quantity changes to brings supply and demand into balance

c. price changes to bring supply and demand into balance

This surplus kick-starts the

adjustment process that pushes the price down.

The slope will be the same where?, but elasticity will change at

all along a linear demand curve, different points along the same demand curve.

What can be inferred about the elasticity of both curves once price goes below $1.50? a. demand is elastic for both curves b. demand is inelastic for both curves c. demand is elastic for the steeper curve and inelastic for the flatter curve d. there is not enough information to make a determination

b.

A decrease in demand causes a decrease in

both equilibrium price and quantity

An increase in demand causes an increase in

both equilibrium price and quantity.

complements are goods that you consume together. Thus, if one of the pair gets more expensive, then you

buy less of both

Recall, inferior goods are goods that you

buy less of when your income goes up (and more of when income goes down)

When you buy a cup of coffee, you are a __ (__) in the coffee market.

buyer, demander

The sign of the cross-price elasticity of demand indicates if the two goods are

complements or substitutes

If the price of a good falls and this causes the quantity demanded of another good to increase, then the items are considered to be complements or substitutes and the cross price elasticity is positive or negative?

complements, negative

An article in Forbes noted that the Intercounty Connector toll road that connects two counties in Maryland was not generating as much toll revenue as predicted. At that time, the toll rate was $8 for a passenger car making a round trip from end to end on the tollway during rush hour. What additional information would you need to know in order to determine if the toll should be increased or decreased? a)The price elasticity of supply b)The income elasticity of drivers using the tollway c) The number of vehicles using the tollway per day d)The price elasticity of demand and why? (2)

d)The price elasticity of demand 1. Understanding the price elasticity of demand will help guide the decision about whether to increase or decrease the toll. 2. If the price elasticity of demand is inelastic, or less than 1, an increase in the toll will increase the total revenue the toll generates.

Almonds are a crop that grows on trees. Farmers do not need to replant trees every year to produce a crop of almonds. It takes at least five years after planting for trees to bear fruit. Several factors such as weather, disease, and long term projections about price impact the supply of almonds available. Barley is a grass that must be planted each year to produce a crop. The growing season is short, about three to four months. Several factors influence farmers' decisions to plant barley each year, including price, weather, and disease.based on this information: a)barley has a more inelastic supply in the short run because barley is more dependent on price in the short run. b)it is impossible to infer anything about the price elasticity of supply for these two crops. c)the crops have the same price elasticity of supply because they are both agricultural commodities. d)almonds have a more inelastic supply in the short run because little can be done to change production in the short run.

d)almonds have a more inelastic supply in the short run because little can be done to change production in the short run.

If a company raised the price of its product by 15%, and sold 10% fewer units... a. demand for the product is currently elastic and revenue decreased. b. demand for the product is currently elastic and revenue increased. c. demand for the product is currently inelastic and revenue decreased. d. demand for the product is currently inelastic and revenue increased.

d. demand for the product is currently inelastic and revenue increased.

The EpiPen is a lifesaving device used by individuals with severe allergies. The U.S. manufacturer of the EpiPen raised its price by nearly 25% per year for nearly a decade. For each 25% increase in the price, quantity demanded would(increase/decrease)by(more than/less than/exactly)25%.

decrease, less than

Taking a more expansive view, we even see markets form in settings in which money

does not actually get exchanged.

(Travel Example): Your timetable allows you to be price sensitive — your demand is

elastic

Greater than 1 is

elastic

With which type of demand curve does total revenue decrease due to the increase in price? a) neither b) elastic demand c) inelastic demand d) both

elastic

Result:

elastic supply

Elasticity and Business Strategy: How can you (as a seller) increase your total revenue? It depends on how

elastic the demand for your product is!

Shopping Example: If clothing is expensive, you are likely to respond to a 15% discount (__), but if the clothing is already cheap, the 15% discount will elicit less of a response from you (__)

elastic, inelastic

when something is flatter it is __ when something's steep it is __

elastic, inelastic

Demand is more __ in the __ __ than in the __ __

elastic, long run, short run

There is a shortage in the market if the quantity demanded

exceeds the quantity supplied

In Extra capacity makes supply elastic: Fixed inputs (a __, a __, an __), act as a

factory, kitchen, office, constraint on a business's ability to expand production

As the price falls, the quantity supplied __, and the quantity demanded __

falls, rises

As the price falls, the quantity supplied __, and the quantity demanded __.

falls, rises

Supply elasticity is all about

flexibility

The change in demand for good X goes __ __ __ __ as the change in the __ __ __ __

in the opposite direction, price of good Y

The change in demand for good X goes

in the same direction as the change in the price of good Y

Necessities tend to have small

income elasticities

An increase in supply causes an __ and a __

increase in price, decrease in quantity.

A decrease in demand causes the demand curve to shift __

left

When the price of gas is ABOVE the equilibrium price level, __, leading to

not enough people want to buy the gas being sold, to a surplus: Qd < Qs

If the goal of a government entity is to raise funds by taxing a good or service, it is easier to raise revenue if the demand curve for the good/service is elastic, inelastic, or perfectly elastic

inelastic

If, however, you need to get across country within the next 48 hours for a family or work-related emergency, then you will buy a ticket regardless of the price. Your timetable does not allow you to be price sensitive — your demand is

inelastic

Example: Coke & Pepsi: Some people are die-hard Coca-Cola drinkers, and would never switch to Pepsi, even if the price of Coke rose dramatically (__ __ __ __)

inelastic demand for Coke

To enter as a seller in the catering market, you need a kitchen, cooking skills, and $100,000 to cover start-up costs. To enter as a seller in the airline market, you need planes, pilots, crew, etc., and a single Boeing 747 costs over $300 million! - Airline market supply is relatively __. - Catering market supply is relatively __.

inelastic, elastic

A completely horizontal demand curve means the price elasticity of demand is

infinite.

Elasticity relation to slope

is not the same thing as slope

The percentage change in quantity supplied is __ than the percentage change in price

larger

Luxuries tend to have what type of elasticities

larger income elasticities

Europe has eight different companies selling devices similar to the EpiPen. If these devices were available for use in the U.S. market, you would expect price elasticity of demand to become(more inelastic/ less inelastic). This would also lead Mylan to charge a(higher/lower)price.

less inelastic, lower price

consumers are __ __ to price changes in the overall category of breakfast cereals which lead to

less responsive, fewer alternatives to cereal overall, than there are for a specific type of cereal.

Inelastic: The absolute value of the price elasticity is

less than 1

There is a surplus in the market if the quantity demanded is

less than the quantity supplied.

Some countries formalize the marriage market by creating a __ __in which people seeking life partners can advertise and/or "shop" the available options. For example,

literal marketplace, China has marriage markets in many cities

If the demand curve for your product is relatively elastic, then you should

lower the price of your good to increase your total revenue

Income elasticities higher than 1 are

luxuries

Market Economy: Each individual

makes their own production and consumption decisions, buying and selling in markets

In a perfectly competitive market there are little/many sellers, each selling different/identical products

many, identical

To get a consistent measure of elasticity between two points, we will use the what? and formula?

midpoint formula when calculating the price elasticity of demand = %ΔQ / %ΔP

When consumers are willing to search for a low-cost alternative, demand for that product is

more elastic

This balance between the two sides of the market is why there is

no tendency for the market price to change from this equilibrium point

If someones income rises, the person will be able to retain their purchase of a service if the subject moderately increases its price. This means that the subject is a

normal good

In this case, the outcome is

not negative

For inelastic supply: The seller is

not responsive to changes in price

Impact of a price change on total revenue depends

on which change was relatively bigger: price or quantity

The impact of the two shifts on equilibrium price and quantity may be ambiguous, such that your conclusion about the new equilibrium may be, "It depends" — it depends

on which curve shifted the most

Your elasticity also depends where you are

on your demand curve.

Shifts in supply cause price and quantity to move in

opposite directions

The market demand curve summarizes __ __ __ __, but if those plans change, then the

people's current buying plans, market demand curve will shift

Cross-price elasticity of demand: measures the

percentage change in quantity demanded that follows from a 1% change in the price of another good

Elasticity =

percentage change in quantity/percentage change in price

Horizontal demand curve means

perfectly elastic

Horizontal supply curve is

perfectly elastic

Vertical demand curve means

perfectly inelastic

Elasticity will differ by what three subjects?

person, product, and price

In this case, the outcome is

positive

Substitutes have a __ cross-price elasticity of demand

positive

Substitutes have a __ income elasticity of demand

positive

whenever you are solving for absolute value change negative answers into

positive

The law of supply tells us

price and quantity supplied move in the same direction

This surplus kick-starts the adjustment process that pushes the

price down.

Flexibility is the underlying determinant of __. The more flexible you are, the __ your price elasticity of supply will be.

price elasticity of supply, greater,

The Demander's Perspective • At a price of $2 you worry the gas station will sell out of gas before you get the amount you want. • You offer to pay 10 cents above the current price in order to ensure you get all the gas you want. Consumers continue to push the __ __as long as the __ __

price up, shortage persists

In easily available variable inputs make supply elastic: If the variable inputs needed to expand production are easily available, then

quickly acquire more of these inputs and start producing more.

If the demand curve for your product is relatively inelastic, then you should

raise the price of your good to increase your total revenue

The Supplier's Perspective • At a price of $2 you totally sell out of gas. • Raising the price to $2.10 you still sell out of gas. • Raising the price to $2.50 you still sell all your gas. You can keep __ and sell all your gas (more profit for you!) as long as __

raising your price, shortage persists

Necessities have what type of demand?

relatively inelastic demand

An increase in demand causes the demand curve to shift __.

right

An increase in supply causes the supply curve to shift __.

right

The market for coffee is at the equilibrium price and a labor shortage drives up the wages of baristas who make the coffee. As a result, the price of coffee will (rise/fall) and the quantity of coffee will (rise/fall)

rise, fall

Slope =

rise/run = change in price/change in quantity

How to find the slope?

rise/run, y2-y1/x2-x1

Effect on Equilibrium Price Ex. 1 Increase in Demand __ Ex. 2 Decrease in Demand __ Ex. 3 Increase in Supply __ Ex. 4 Decrease in Supply __

rises falls falls rises

Effect on Equilibrium Quantity Ex. 1 Increase in Demand __ Ex. 2 Decrease in Demand __ Ex. 3 Increase in Supply __ Ex. 4 Decrease in Supply __

rises falls rises falls

As the price rises, the quantity supplied __, and the quantity demanded __

rises, falls

Whenever the price is BELOW the equilibrium price. The lower the price is below the equilibrium price, the larger the

shortage

At the supply-equals-demand equilibrium, there is no

shortage or surplus

if there is worry that consumers may drastically change their consumption in response to a price change, a business should or should not increase their price?

should not

For inelastic supply: The percentage change in quantity supplied is __ than the percentage change in price

smaller

The price elasticity of demand (elastic versus inelastic) tells us whether the percentage change in price is

smaller or larger than the percentage change in quantity.

Elasticity is all about

substitutability

You may have observed that items such as different brands of aspirin, tomato sauce, or gasoline are typically priced the same as each other. This is particularly true when consumers can find these goods in close proximity to each other. For example, prices are often the same at gas stations that are on opposite sides of the street. Prices are also generally the same for products next to each other on the same grocery store shelf. The aforementioned examples are goods that are likely to be (complements or substitutes). The aforementioned examples are goods that are likely to be (small, insignificant, large), because the opportunity cost of getting information on price is low.

substitutes, large

If the price of a good falls and this causes the quantity demanded of another good to fall, then the items are considered to be complements or substitutes and the cross price elasticity is positive or negative?

substitutes, positive

Actual formula for Midpoint Formula

x2-x1/(x2+x1)/2 x 100

The supply-equals-demand equilibrium occurs where the

supply and demand curves meet

The higher the price is above the equilibrium price, the larger the

surplus

At equilibrium, there is no

tendency for change.

What does the market supply curve summarize?

the current selling plans, but if those plans change, then the supply curve will shift

Midpoint formula: Divide

the difference between two points by the average of the two points

In 2017, Hurricane Irma had a significant, negative impact on the orange harvest in the state of Florida. The U.S. Department of Agriculture predicted that the quantity of oranges produced would be 21% lower than the previous year. If the price elasticity of demand for oranges is -1.5, what impact would Hurricane Irma have on the price of oranges? change in price of oranges: how would you solve?

the formula you would get is 21/x = -1.5 divide 21 and 1.5 and get your answer which is 14

Use price elasticity of demand to forecast

the likely consequences of a given price change.

Income elasticity of demand measures

the percentage change in quantity demanded that follows from a 1% change in income

Price elasticity of supply measures

the percentage change in quantity supplied that follows from a 1% price change.

A shortage pushes

the price up

Example: If the price of gas falls from $3 to $2, it will cause __ __ __ __ __. By __

the quantity demanded to rise, how much depends on whether buyers have

The percentage change depends on

the starting point

The price of gas continues to fall until

the surplus is eliminated and the market forces are in balance at the market equilibrium

When the price of gas is BELOW the equilibrium price level, there are

too many people chasing too little gas, leading to a shortage: Qd > Qs

Marginal benefit =

total benefit / change number of subject

Marginal Cost =

total cost / change number of subject

The same rise in price caused what two things?

total revenue to fall in the elastic case, and rise in the inelastic case

In over time, supply becomes more elastic: Price elasticity of supply is

typically larger (more elastic) when viewed over a longer time frame:

For elastic supply: The seller is __ __ to price.

very responsive

This is why you are more likely to encounter a Starbucks in

wealthier cities rather than poorer rural areas, and why Starbucks focuses on specialty drinks you can't find elsewhere

Substitutes are goods that can replace one another. Thus, if good Y gets more expensive, then

you simply switch to good X (i.e., the QD of good X increases).

normal goods are goods that you buy more of when

your income goes up (and less of when your income goes down).