Econ ch5

Price elasticity of supply

Measures how much the quantity supplied responds to changes in the price. This often depends on the *time horizon*. In most markets, supply is *more elastic in the long run* than in the short run.

Which is more elastic? Why? Required textbooks or mystery novels

mystery novels mystery novels have close substitutes and are luxury goods; required textbooks are necessity and with no close substitutes.

If the elasticity is greater than 1...

Demand is elastic (p101)

If the elasticity equals zero...

Demand perfectly inelastic (p101)

What do we call a good with an income elasticity less than zero?

*income elasticity less than zero*-- inelastic-- increase in income will decrease quantity-- inferior good. (*income elasticity ≠ price elasticity)

For *elastic* demand curve, total revenue moves in the ... direction as the price.

*opposite direction*

For *inelastic* demand curve, total revenue moves in the ... direction as the price.

*same direction*

List and explain the four determinants of the price elasticity of demand discussed in the chapter.

1. close substitutes are available 2. luxury or necessity 3. market is narrowed or not 4. if buyers have time to react to a price change

Demand tends to be *more elastic* if...

1. close substitutes are available 2. the market is narrowly defined (Merlot wine, more substitutes; food, no substitutes)) 3. buyers have substantial time to react to a price change

A life-saving medicine without any close substitutes will tend to have A small elasticity of demand A large elasticity of demand A small elasticity of supply A large elasticity of supply

A small elasticity of demand. Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from such a good to others. In contrast, goods without close substitutes, such as a unique life-saving medicine, have a less elastic demand.

Which is more elastic? Why? Beethoven recordings or classical music recordings in general

Beethoven recordings is more elastic a narrower market, easier to find close substitutes for them.

A price change causes the quantity demanded of a good to decrease by 30%, while the total revenue of that good increases by 15%. True or False: The demand curve is elastic in this region.

False In order for a price increase to increase total revenue, the % change in price has to be larger than the % change in quantity. Therefore, the demand curve is inelastic in this region.

If demand is elastic, how will an increase in price change total revenue?

If D = *elastic*, increase in price will decrease total revenue. Elastic-- plenty substitutes, not a narrow market, buyers have time to react to price change, not a luxury good.

Which is most elastic? And which is least elastic? Wine Beverage Merlot

In between Least elastic Most elastic (the more specific the type of beverage, the more close substitutes are available. If the price of wine rises, a consumer could purchase beer or soda, but most people would not consider those very close substitutes. If the price of merlot rises, consumer could switch to shiraz or cabernet.)

If a fixed quantity of a good is available, and no more can be made, what is the price elasticity of supply?

Inelastic/ perfectly inelastic (any change in price will not affect supply)

The price of coffee rose sharply last month, while the quantity sold remained the same. Five of the Big Bang Theory friends suggested various explanations. Raj: Supply decreased, but demand was perfectly inelastic. Penny: Demand increased, but supply decreased at the same time. Sheldon: Demand increased, but it was perfectly inelastic. Leonard: Demand increased, but supply was perfectly inelastic. Howard: Supply decreased, but demand was unit elastic.

Raj: Supply decreased, but demand was perfectly inelastic. Penny: Demand increased, but supply decreased at the same time. Leonard: Demand increased, but supply was perfectly inelastic.

Which is more elastic? Why? Root beer or water

Root beer has close substitutes *and it is luxury goods* while water is necessity and with no close substitutes.

A storm destroys half the fava bean crop. Is this event more likely to hurt fava bean farmers if the demand for fava beans is very elastic or very inelastic?

This storm would hurt farmers more if the demand was elastic. If demand was inelastic for their products, farmers receive greater total revenue as a group if they supply a smaller crop to the market.

A good with many close substitutes is likely to have relatively ________ demand, since consumers can easily switch to a substitute if the price of the good rises.

elastic

If *quantity* demanded moves proportionately *less*...

elasticity *less than 1*; *inelastic*

A good's price elasticity of demand depends in part on ______

how necessary it is relative to other goods.

If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation. Therefore, the demand for gasoline is ______ elastic in the short run than in the long run.

less

Cross-price elasticity of demand

measures how much the quantity demanded of one good responds to changes in the price of another good.

Income elasticity of demand

measures how much the quantity demanded responds to changes in consumers' income

Which is more elastic? Why? Subway rides during the next 6 months or subway rides during the next 5 years

subway rides during the next 5 years buyers have time to react to the price change *longer time horizons*

An increase in the supply of a good will decrease the total revenue producers receive if the demand curve is inelastic. the demand curve is elastic. the supply curve is inelastic. the supply curve is elastic.

the demand curve is inelastic An increase in the supply of a good means that the price of the good will fall and the quantity sold will rise. In order for this to decrease total revenue, it must be that the percentage change in price is larger than the percentage change in quantity. Because the price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, you can use the following formula to determine whether the demand curve is inelastic or elastic in this region. Therefore, the demand curve must be inelastic in this region (that is, have a price elasticity of less than one) in order for an increase in supply to lead to a decrease in total revenue. See Section:* Elasticity and Total Revenue along a Linear Demand Curve.*

The ability of firms to enter and exit a market over time means that, in the long run, the demand curve is more elastic. the demand curve is less elastic. the supply curve is more elastic. the supply curve is less elastic.

the supply curve is more elastic. In most markets, *a key determinant of the price elasticity of supply is the [time period]* being considered. *Supply is usually more elastic in the long run than in the short run*. Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good. Thus, in the short run, the quantity supplied is not very responsive to the price. By contrast, over longer periods, firms can build new factories or close old ones. In addition, new firms can enter a market, and old firms can shut down. Thus, in the long run, the quantity supplied can respond substantially to price changes, making the supply curve more elastic in the long run versus the short run.