Chapter 4- Elasticity
Demand "D" represents a demand curve that is
perfectly inelastic
The price elasticity of demand measures the
responsiveness of quantity demanded to a change in price
price elasticity
the relationship between the percent change in price resulting in a corresponding percentage change in the quantity demanded or supplied
inelastic demand
when the elasticity of demand is smaller than 1, indicating a low responsiveness of quantity demanded price changes
growth rate
Percentage change= Change in quantity/ Quantity
Price elasticity of demand
Price elasticity of demand= Percentage change in quantity demanded/ Percentage change in price
inferior good
a good for which the quantity demanded falls as income rises, and the quantity demanded rises as income falls; income elasticity of demand for an inferior good is negative
normal good
a good for which the quantity demanded rises as income rises, and the quantity demanded falls as income falls; income elasticity of demand for a normal good is positive
Negative cross-price elasticity of demand between two goods indicates that the two goods are
complements
Suppose the price of apples increase by 20%, resulting in consumers to purchase 15% more pears. Given this information, it appears that
cross-price elasticity of pears is 0.75
A perfectly elastic supply curve is
horizontal
An addicted smoker likely has which type of demand?
inelastic
Price elasticity of demand
is the percentage change in the quantity of a good or service demanded divided by the percentage change in the price.
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?
lower the price
Competitive dynamics
Goods that can only be produced by one supplier generally have inelastic demand, while products that exist in a competitive marketplace have elastic demand. This is because a competitive marketplace offers more options for the buyer
Elasticity measures the behavioral response of economic agents in a given situation. Which question is likely to be answered using elasticity?
If a restaurant puts their pizza on sale, will the additional number of pizzas sold offset the discount on each item? Will their sales revenues for pizza go up or down?
A person who takes life-saving prescription drugs most likely has a(n) ________demand for that drug. Therefore an increase in the price of the drug will result in ________ total revenue for the drug company.
inelastic; increased
When income increases and demand for a good falls, the good is considered a
inferior good
income elasticity of demand
is the percentage change in quantity demanded divided by the percentage change in income
Given that total revenue = price x quantity, what will happen to total revenue if price increases when demand is elastic?
it will decrease
cross-price elasticity of demand
percent change in Qd of good A/ percent change in price of good B
elasticity of savings
percent change in quantity of financial savings/ percent change in interest rate
elasticity of labor supply
percent change in quantity of labor supplied/ percentage change in wage
midpoint method for elasticity
percent change in quantity= (Q2−Q1/ (Q2−Q1)/2) * 100 percent change in price= (P2−P1/ (P2−P1)/2) * 100
Price Elasticity of Demand
percent change in quantity/ percentage change in price
price elasticity of demand
percentage change in the quantity of a good or service demanded divided by the percentage change in price
price elasticity of supply
percentage change in the quantity of a good or service supplied divided by the percentage change in price
growth rate
percentage change: the change in quantity divided by the quantity
Elastic supply occurs if the change in quantity supplied is ________ to a change in price.
relatively responsive
Which of the following factors does NOT influence the price elasticity of demand of a product?
slope of the supply curve
infinite elasticity
the extremely elastic situation of demand or supply in which the quantity changes by an infinite amount in response to any change in price; also called "perfect elasticity"
zero elasticity
the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; also called "perfect inelasticity"
When a 10% increase in income causes a 4% increase in quantity demanded of a good
the income elasticity is .4 and the good is a normal good
income elasticity of demand
the percentage change in quantity demanded divided by the percentage change in income
The elasticity of demand is defined as
the percentage change in quantity demanded divided by the percentage change in price
The elasticity of supply is defined as the
the percentage change in quantity supplied divided by the percentage change in price
Unitary
then % change in Qd is equal to % change in P therefore A given % rise in P will be exactly offset by an equal % fall in Q so that total revenue (P times Q) is unchanged.
Elastic
then % change in Qd is greater than % change in P therefore A given % rise in P will be more than offset by a larger % fall in Q so that total revenue (P times Q) falls.
Inelastic
then % change in Qd is less than % change in P therefore A given % rise in P will cause a smaller % fall in Q so that total revenue (P times Q) rises.
constant unitary elasticity
when a given percentage change in price leads to an equal percentage change in quantity demanded or supplied
unitary elasticity
when the calculated elasticity is equal to 1, indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
elastic demand
when the elasticity of demand is greater than 1, indicating a high responsiveness of quantity demanded to changes in price
elastic supply
when the elasticity of supply is greater than 1, indicating a high responsiveness of quantity supplied to changes in price
inelastic supply
when the elasticity of supply is smaller than 1, indicating a low responsiveness of quantity supplied to price changes
Teenage workers are assumed to have ________ labor supply; therefore a 5% increase in wages would result in ________ percentage change in quantity of labor supplied.
elastic; greater
If a large change in price results in a small change in demand, then demand is
inelastic
percent change in quantity
percent change in quantity/ percentage change in price
When the local grocery store puts cereal on sale, reducing its price from $4.10 per item to $3.40 per item, the quantity sold increases from 220 per week to 240 per week. This response illustrates which of the following concepts?
price elasticity of demand: The formula that we'll use here is price elasticity of demand, which is the percentage change in quantity demanded divided by the percentage change in price.
wage elasticity of labor supply
the percentage change in hours worked divided by the percentage change in wages
cross-price elasticity of demand
the percentage change in the quantity of good A that is demanded as a result of a percentage change in the quantity of good B demanded
elasticity of savings
the percentage change in the quantity of savings divided by the percentage change in interest rates
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).
the price elasticity of demand for good Z= 0.86
total revenue
the price of an item multiplied by the number of units sold
elasticity
the responsiveness of one variable to changes in another variable
Necessities vs. luxuries
A necessity is something you absolutely must have, almost regardless of the price. A luxury is something that would be nice to have, but it's not absolutely necessary. Consider the elasticity of demand for cookies. A buyer may enjoy a cookie, but it doesn't fulfill a critical need the way a snow shovel after a blizzard or a life-saving drug does. In general, the greater the necessity of the product, the less elastic, or more inelastic, the demand will be, because substitutes are limited. The more luxurious the product is, the more elastic demand will be.
In a market with relatively inelastic demand, if the supply curve shifts due to a fall in production costs, the equilibrium price will ________ by ________ than equilibrium quantity.
decrease; more
If a small change in price creates a large change in demand, then we would say that the demand is
elastic
The size of the change in the quantity demanded of a good or service due to change in its price is measured by the elasticity of demand. When the percentage change in the quantity demanded for a good or service is more than the percentage change in price, the demand for that good or service is ________ and price elasticity is ________.
elastic; greater than 1
Share of the consumer's budget
If a product takes up a large share of a consumer's budget, even a small percentage increase in price may make it prohibitively expensive to many buyers. Take rental housing that's located close to downtown. Such housing might cost half of one's budget. A small percentage increase in rent could cause renters to relocate to cheaper housing in the suburbs, rather than reduce their spending on food, utilities, and other necessities.
Substitutes
Price elasticity of demand is fundamentally about substitutes. If it's easy to find a substitute product when the price of a product increases, the demand will be more elastic. If there are few or no alternatives, demand will be less elastic.
Short run versus long run
Price elasticity of demand is usually lower in the short run, before consumers have much time to react, than in the long run, when they have greater opportunity to find substitute goods. Thus, demand is more price elastic in the long run than in the short run
