Chapter 4. Elasticity
Along a linear demand curve, price elasticity of demand
Is inelastic at lower prices Is elastic at higher prices
A line with a slope of (-5) will be ___ than a line with a slope of (-2).
Less elastic Steeper
Goods often have more elastic demand in the ___ run than in the ___ run.
Long Short
The more flexible the production process, the ___ elastic the supply of the product.
More
All else held equal, if consumers spend a relatively large share of their income on a good, their demand for the good will be relatively
More elastic
When a good is a luxury, compared to a necessity, demand will tend to be
More elastic.
When demand is perfectly inelastic, consumers are
Not sensitive to price.
When demand is elastic,
a price increase causes total revenue to fall.
Total revenue will decrease when price decreases and demand is ___
Inelastic.
For ___ goods, income elasticity is negative.
Inferior
The general formula for the price elasticity of demand is:
% change in Q demanded/% change in P
The general formula for the price elasticity of supply is:
% change in Q supplied/% chanhe in P.
Suppose the demand for coffee went from 10 million cups at $2 to 15 million cups at $1.50. Using the mid-point formula, the price elasticity of demand is approximately ___.
-1.38 or -1.4
Suppose the demand for coffee went from 10 million cups at $2 to 15 million cups at $1.80. Using the mid-point formula, the price elasticity of demand is approximately ___.
-3.80
Suppose the price of coffee beans goes from $1 to $1.20 per pound, production increases from 90 million bags of coffee beans per year to 100 million bags. Using the midpoint method, the price elasticity of supply would be approximately,___.
0.60
When the absolute value of a price elasticity of demand is greater than ___, we say that demand is elastic
1
When the price elasticity of supply is greater than ___, we say that supply is elastic.
1
When the demand curve is relatively more elastic,
A small change in price causes a large change in the quantity demanded.
if income elasticity of demand is negative, the good is
An inferior good.
Concept of elasticity allows economic decision makers to
Anticipate how others will respond to changes in market conditions.
The mid-point method of calculating the price elasticity of demand
Avoids the problem related to the direction of the price movement.
Elasticity is a measure of how much ___ and ___ are sensitive to price changes.
Consumers Producers
A percentage change is the
Difference between the starting and ending levels divided by the starting level, expressed as a percentage.
Describe the following equation: %changeQD/%changeincome
Income elasticity
When the absolute value of the price elasticity of demand is less than one, we say that demand is
Inelastic
When the quantity effect ___ the price effect, a price increase will cause a drop in revenue.
Outweighs
In order to avoid dependence on which unit of measurement used, the price elasticity of demand is computed using ___ changes.
Percentage
The following equation, Q2-Q/Q1 X 100 Illustrates a ___ change in quantity demanded.
Percentage
The mid-point method solves the direction problem because it measures the
Percentage change relative to a point midway between the two points.
Economists use the percentage change in quantity rather than the absolute change in quantity to measure the price elasticity of demand because
Percentage changes are not influenced by the unit of measure.
If a good is a luxury, income elasticity of demand will be
Positive but greater than 1.
Price elasticity of supply describes the size of the change in the quantity supplied of a good or service when its ___ changes.
Price
Price elasticity of demand is always negative because
Price and quantity move in opposite direction.
When demand is inelastic and the price changes, the
Price effect outweighs the quantity effect.
Supply is more elastic over long periods than over short periods because
Producers can make more adjustments in the long run than in the short run.
The factors that affect the price elasticity of supply do not include:
Relative need and relative cost.
Knowing whether the demand for a good is elastic or inelastic is useful in business, because it allows a manager to determine whether a price increase will cause total ___ received by the firm to rise or fall.
Revenue
When there is a decrease in price, the price effect will decrease the total ___.
Revenue
If producing more of a good costs a lot more than the initial quantity did,
Supply will be less elastic.
Which of the following factors determine the price elasticity of demand?
The availability of substitutes Relative need and relative cost The time needed to adjust to price changes
As quantity increases, the price elasticity of demand falls along a linear demand curve because
The percentage change in price rises as the quantity increases.
Supply would be less elastic if
The production process is less flexible.
The income elasticity of demand for a good describes how much
The quantity demanded changes in response to a change in consumers' income.
True or False: When there is a decrease in price, the quantity effect on revenue results from selling more units of the good.
True
True or False: If close substitutes are available for a particular good, then the demand for that good will be more elastic than if only distant substitutes are available.
True
True or False: the price elasticity of demand for pears is higher than the price elasticity of demand for fruit.
True
When the absolute value of the price elasticity of demand is equal to one, we say that demand is ___-elastic.
Unit
When demand is perfectly elastic, consumers are
Very sensitive to price.
The price elasticity of demand will always be a negative number because
price and quantity demanded move in opposite directions.
Price elasticity of demand describes
the size of the percentage change in the quantity demanded of a good or service when its price changes by one percent.
