Week 06: Chapter 06: Elasticity

If the price elasticity of demand for a product is unity, a decrease in price will

increase the quantity demanded, but total revenue will be unchanged.

The concept of price elasticity of demand measures

the sensitivity of consumer purchases to price changes.

What does perfectly Elastic look like graphically?

A completely horizontal line on the price.

Why is elasticity of demand always negative?

Because price and quantity demanded always move in opposite directions on the demand curve; when price goes up, quantity goes down and vice versa.

The larger the positive cross elasticity coefficient of demand between products X and Y, the

greater their substitutability.

The narrower the definition of a product,

the larger the number of substitutes and the greater the price elasticity of demand.

In an immediate market period (where there is no time to change quantity of supplied goods) supply is fixed. This would be perfectly inelastic, what does this look like graphically?

Since supply would be perfectly inelastic, on a graph, the supply line would be a perfectly vertical on the quantity that is supplied.

What is the formula for price elasticity of demand?

Percentage change in quantity demanded/percentage change in price

What is the formula for price elasticity of supply?

Percentage change in quantity supplied/percentage change in price

How do elasticity, price and quantity demanded affect total revenue?

Price change Inelastic: P increases, TR increase & P decreases, TR decreases Elastic: P increases, TR decreases & P decreases, TR increases Quantity demanded change Inelastic: Q demanded increases (causes P to decrease), TR decreases & Q demanded decreases (causes P to increase), TR increases Elastic: Q demanded increases (causes P to decrease), TR increases & Q demanded decreases (causes P to increase), TR decreases Note: the total revenue test does not apply to supply (only demand)

In what possible instances will total revenue decline?

Price rises and demand is elastic or price lowers and demand is inelastic.

What is the formula for total revenue?

TR = P x Q

Elasticity in the long run compared to the short run is generally

greater in the long run than in the short run.

Why is elasticity of supply always positive?

Because price and quantity supplied always move in the same direction on the supply curve; when price goes up, quantity goes up and vice versa.

Explain why using the slope of a demand curve alone is not sufficient to measure elasticity and how the elasticity changes as you move along a linear demand curve.

Elasticity changes along a demand curve while slope might not (if it is a straight line). Demand tends to be more elastic in upper left portion of demand and more inelastic in the lower right portion. The slope of a curve shows changes as a numerical value (absolute change) and elasticity shows changes in percentage (relative changes).

When does the cross price elasticity of two goods imply that the goods are substitutes? What about compliments?

If the cross elasticity is positive, this implies that an increase in the price of one good results in an increase in the quantity purchased of another good (substitutes). If the cross elasticity is negative, this implies that an increase in the price of one good results in a decrease in the quantity purchased of another good (compliments).

Is the government more likely to impose an excise tax on elastic or inelastic goods.

Inelastic because even if the price of the good rises, the quantity demanded of the good will remain relatively unchanged.

What does it mean when price elasticity of demand is inelastic? Unit elastic? Elastic?

Inelastic: Less than one. Percent change in quantity demanded is smaller than the percent change in price. Unit elastic: Equal to one. Percent change in price and percent change in quantity demanded are equal to each other. Elastic: Greater than one. Percent change in quantity demanded is larger than the percent change in price.

What does it mean when price elasticity of supply is inelastic? Unit elastic? Elastic?

Inelastic: Less than one. Percent change in quantity supplied is smaller than the percent change in price. Unit elastic: Equal to one. Percent change in price and percent change in quantity supplied are equal to each other. Elastic: Greater than one. Percent change in quantity supplied is larger than the percent change in price.

If the demand for farm products is price inelastic, a good harvest will cause farm revenues to

decrease.