4 - Elasticity

True/false: the elasticity of supply equals the change in the quantity supplied divided by the change in price.

false: the price elasticity of supply equals the percentage change in the quantity supplied divided by the percentage change in price.

True/false: the price elasticity of demand is the same as the slope of the demand curve.

false: the slope of the demand curve equals the change in y over the change in x whereas the price elasticity of demand equals (the change in Q divided by the average Q) divided by (the change in P divided by the average P).

True/false: a good has an elastic demand if its income elasticity of demand exceeds 1.0.

false: to be elastic, the price elasticity of demand must exceed 1.0.

True/false: the cross elasticity of demand between hot dogs and hot dog buns is negative.

true: hot dogs and hot dog buns are complements, so the cross elasticity of demand is negative.

True/false: if a good has a vertical supply curve, its elasticity of supply equals 0.

true: when the elasticity of supply equals zero, the supply is perfectly inelastic.

inelastic demand

a demand with a price elasticity between 0 and 1; the percentage change in the quantity demanded is less than the percentage change in price

total revenue test

a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same

elastic demand

demand with a price elasticity greater than 1; other things remaining the same, the percentage change in the quantity demanded exceeds the percentage change in price

perfectly inelastic demand

demand with a price elasticity of 0; the quantity demanded remains constant when the price changes

unit elastic demand

demand with a price elasticity of 1; the percentage change in the quantity demanded equals the percentage change in price

income elasticity of demand

the responsiveness of the demand for a good to a change in income, other things remaining the same; calculated as the percentage change in the quantity demanded divided by the percentage change in income

cross elasticity of demand

the responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same; calculated as the percentage change in the quantity demanded divided by the percentage change in the price of the substitute or complement

elasticity of supply

the responsiveness of the quantity supplied of a good to a change in its price, other things remaining the same

True/false: as time passes after a price change, the price elasticity of demand becomes smaller.

false: as more time passes, more changes in demand can occur, so demand becomes more elastic.

True/false: if the price elasticity of demand is positive, the demand is elastic.

false: demand is elastic when the price elasticity of demand exceeds 1.0.

True/false: moving along a linear demand curve to lower prices and increased quantities, the price elasticity of demand does not change.

false: moving downward along a linear demand curve, the price elasticity of demand falls.

True/false: your local Domino's Pizza outlet estimates that the price elasticity of demand for its pizza is 4.00, so if it raises the price it charges for its pizza, its total revenue will increase.

false: the demand for Domino's Pizza is elastic; raising the price decreases the quantity by so much that total revenue declines.

price elasticity of demand

the units-free measure of the responsiveness of the quantity demanded of a good to a change in its price, when all other influences on buyers' plans remain the same

total revenue

the value of a firm's sales; calculated as the price of the good multiplied by the quantity sold

True/false: an inferior good has an income elasticity that is negative; a normal good has an income elasticity that is positive.

true: an increase in income decreases the demand for inferior goods and increases it for normal goods.

True/false: people spend more on rent than on soap, so the price elasticity of demand for housing is likely to be larger than the price elasticity of demand for soap.

true: generally, the larger the total budget share spent on a good, the larger is the price elasticity of demand.

True/false: Exxon brand gasoline is likely to have an elastic demand.

true: other brands of gasoline, such as Shell or BP, are close substitutes for Exxon, so the demand for Exxon gasoline is likely to be elastic.

True/false: the price elasticity of demand for food is largest in poor nations.

true: the price elasticity of demand for food in poor nations is larger than that in rich nations because in poor nations, food takes a larger portion of consumer's incomes.

True/false: the price elasticity of demand ranges from 0 to infinity.

true: the smallest value for the price elasticity of demand, 0, means demand is perfectly inelastic; the largest, infinity, means perfectly elastic demand.

True/false: the more demanders respond to a price change, the larger the price elasticity of demand.

true: the stronger the response to a price change, the larger is the elasticity.

perfectly elastic demand

demand with an infinite price elasticity; the quantity demanded changes by an infinitely large percentage in response to a tiny price change