econ quiz 2
This table shows the supply and demand for socks. If the government imposes a price floor of $10, how many pairs of socks will be exchanged on this market?
2 Since the equilibrium price is $8, a price floor of $10 is an effective price floor. Setting a price floor of $10 means that producers will be happy and willing to provide 8 units to the market, but consumers only want to buy 2 units. Since exchange is voluntary, only 2 units will be bought and sold in this market.
Suppose you know that the price elasticity of demand for your product is 0.5, and you are thinking about raising your price by 8%. How much can you expect quantity to decrease?
4%. The equation for elasticity of demand is percentage change in quantity divided by the percentage in price. In this case, we know two of these: -0.5 = Percentage Change in Quantity / 8%. Solving for the numerator (8% x -0.5) = -4%: quantity will decrease 4%.
What is the percentage change in quantity supplied? ______%
50.0 2 = 50%/25% (elasticity of supply = percentage change in quantity supplied / percentage change in price)
What is the percentage change in quantity demanded? ______%
75.0 -3=75%/25%
Necessity:
A good or service that is viewed by consumers as a high priority. Consumers tend to be less sensitive to price changes of goods that are assumed to be necessities.
A change in supply will have a (greater, lesser, the same) effect on price for a relatively more inelastic demand curve than a relatively more elastic one.
A greater Price will increase quite a bit before equilibrium is reached with inelastic demand. Thus the change in price will be greater in inelastic than elastic demand. With elastic demand, an increase in price causes a faster decrease in quantity.
A change in supply will have a (greater, lesser, the same) effect on quantity for a relatively more elastic demand curve than a relatively less elastic one.
A greater This is a bit more difficult. Supply decreases, for example. Price starts to increase. If demand is relatively inelastic, price has to increase a lot to decrease quantity demanded enough to equal the quantity supplied. The new equilibrium quantity demanded will be relatively close to quantity demanded at the old price. If demand is relatively elastic, price will begin to increase and quantity demanded will fall quickly and thus the quantity will end up being closer to the original amount.
Price ceiling:
A legal maximum price. An effective price ceiling is a legal maximum price that is below the equilibrium price. Examples include laws limiting apartment rents in some cities.
Minimum wage:
A legal minimum for wages (the price of one hour of labor) for most categories of workers.
Which of the following statements about the effects of a government setting maximum prices is true?
A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price. If the price ceiling is set above the equilibrium price, then it is not effective and the equilibrium price will prevail and no shortage occurs.
Which of the following statements about the effects of rent control is true?
A maximum price will cause a shortage of a good to be produced only if the maximum price is below the equilibrium price. The effect of the rent control would be to cause a shortage of the good, so long as the price ceiling is set below the equilibrium price. The ceiling will cause the quantity demanded to be larger than the quantity supplied, so a shortage will develop.
Rent control:
A policy which sets a legal maximum rent that can be charged for some apartments in some major cities.
Many major U.S. cities have adopted rent controls for some housing. An effective rent control is what kind of price control?
A price ceiling with a maximum price below equilibrium price Cities consider rent controls because the demand for apartments has allowed rent levels to increase dramatically. In order to make things more affordable to many, cities want to limit how high the prices can get. This would be imposing a limit to keep the level of prices below equilibrium. The price control would be a price ceiling with a maximum price below the equilibrium.
Which of the following is likely to have the largest elasticity of supply?
A producer of vanilla ice cream It is far easier for a producer of vanilla ice cream to react and change production if the price of vanilla ice cream changes than it is for a dentist or someone who builds yachts.
If the government imposes an effective price ceiling in a market, what will be the result?
A shortage Since this price ceiling is 'effective' this suggests the maximum price is less than the free market equilibrium price. When the price ceiling is below the equilibrium price, it means that the price cannot rise above that level. At the price ceiling, there will be a higher quantity demanded for this good than producers are willing to supply. Therefore, there will be a shortage.
Using the table above, if the government imposes a price floor of $10, what will the effect be?
A surplus of 6 units Producers are willing to provide 8 units to the market, but consumers are only willing to buy 2 of those units, leaving 6 left over.
Rank the following in order from the least elastic demand to most elastic.
Allergy medicine that is prescribed by a physician Any over-the-counter allergy medicine Sudafed Cold and Allergy Medicine Necessity is important for understanding elasticity. Prescription medication is an example of a good that we purchase out of necessity. If a consumer is told to take a medication by a physician, chances are that she will do so and be relatively insensitive to price. Prescription allergy medicine is the least elastic. Generic goods will have lots of options. The more substitutes there are for a good, the greater the elasticity will be. That means that with other options, it is easy for a consumer to switch between brands if prices fluctuate. Sudafed Cold and Allergy Medicine is a brand name for a type of medicine and is a specific kind within a large selection of medicines. Any general over-the-counter medicine will be just as good to some consumers, so if the price of a specific brand goes up, they will replace it with another option. Over-the -counter allergy medicine is less elastic then than the specific product Sudafed Cold and Allergy Medicine, because there are fewer substitutes. But there are likely to be some substitutes.
If population increases in a city with effective rent controls (and nothing else changes), which of the following describes what will happen in the market for rental housing?
An increase in population will make demand increase, but rent control is a price ceiling, meaning that price is not allowed to rise. Therefore, demand will increase, but supply will not since price is capped at the ceiling.
When the federal government subsidizes higher education in the form of Pell grants to students, it results in
An increase in the demand for higher education The effect of a subsidy directly to the consumer is that the effective price of that particular product decreases for the consumer. Therefore, the quantity of higher education demanded at each price would increase with more Pell grants.
When the federal government subsidizes higher education in the form of direct subsidies to universities, it results in:
An increase in the supply of higher education The effect of a subsidy directly to the supplier of higher education is a reduction in costs. Anytime there is a decrease in the cost of doing business, supply increases.
Who really pays the tax? Is the elasticity of demand relevant here? What do you expect to be the difference between the elasticity of demand for cigarettes between teenagers and adults?
Both consumers and producers pay the tax. Yes the elasticity of demand is relevant here. Teens have a more elastic demand since they aren't as addicted as adults.
If the government is trying to raise as much revenue as possible, which of the following goods would be the most likely to be subject to a government-imposed tax?
Bottles of alcohol, such as whiskey and gin The government is most likely to impose a tax on a good with a very inelastic demand. That includes goods that people can become addicted to, like cigarettes and alcohol.
Why are college textbooks so expensive when other books that cost the same to produce have a lower price?
College textbooks are more expensive because there is a higher quantity demanded for them. Since there is such a high quantity demand for them, sellers sell them at a higher price to increase their profit.
A government may impose a price ceiling if which of the following is true?
Consumers can persuade legislators that lower prices are needed Price ceilings benefit consumers because an effective price ceiling is below the equilibrium price.
Compare the likely elasticity of demand for a college education with the likely elasticity of demand for a degree at one specific institution.
Demand for a college education is less elastic than the demand for a degree at one specific institution. There are many different colleges that you can go to.
Use the concepts of supply and demand to explain what is happening in the case above - and why - in the coffee market. Is it demand, supply, or both changing in this case?
Demand increases because there is an increase in taste for good coffee. Supply decreases because of weather issues with the crop. Both supply and demand cause the price increase.
Elastic:
Demand is elastic when the percentage change in the quantity demanded is greater than the percentage change in the price of the good or service. The price elasticity of demand is greater than one.
Inelastic:
Demand is inelastic when the percentage change in the quantity demanded is less than the percentage change in the price of the good or service. The price elasticity of demand is less than one
If the country enters a period of prosperity, resulting in consumer incomes increasing by 4% and the income elasticity of a good is 0.8, what will happen to the demand for that good as a result?
Demand will increase by 3.2% Solve for change in quantity in the income elasticity equation; multiply 4% by 0.8 to get 3.2% increase in quantity.
In the question above, if the city examined the elasticity of bus fares over this longer time period, what would they likely find?
Elasticity is now greater than 1 Consumers have an opportunity to find alternatives to bus transportation, so they are likely to be more responsive in two years.
Rank the following from the least elastic (most inelastic) to most elastic.
From least elastic to most elastic - demand for food, demand for dessert, demand for cookies, and demand for Oreos. The reasoning is that there are few substitutes for food, and it is a necessity. Thus, the demand for food is likely to be quite inelastic. However, dessert is less of a necessity and therefore more likely to have a more elastic demand. There are many substitutes for cookies and even more substitutes for Oreos.
Substitutes:
Goods or services that consumers consider as serving similar purposes.
Diesel automobiles contributing to smog Trees in a natural forest¸ usable for making wood floors Yellowstone National Park Higher education
Goods with external costs Common resources Public goods Goods with external benefits
You are running a small business and are thinking about ways to increase your profits. Assume you are facing an elastic demand. Would you raise or lower your prices?
I do not know because I cannot tell how much costs would change in relationship to revenues. If demand is elastic, a price increase will cause a greater percentage decrease in quantity. Revenues will fall. Costs will fall. We cannot tell about profits, because we do not know the relative sizes of the cost decrease and the revenue decrease. A price decrease will result in an increase in revenues as the quantity demanded increases by a larger percentage than the decrease in price. But we don't know how large the increase in costs would be to produce that larger amount of output. Here also, we do not know what happens to profits.
Which product is more likely to have an elastic supply: ice cream or diamonds?
Ice cream because it is easier to make than it is to find a diamond.
Assume demand is elastic. Click the corresponding arrow to indicate how quantity, revenues, costs, and profit will be affected if prices are increasing or decreasing. If there is not enough information to tell, do not select an answer for that section. [Image description: The table rows are price (increases) and price (decreases). The columns are quantity, revenues, costs, and profits, each with corresponding up and down arrows showing how they will be affected if prices are increasing or decreasing.]
If demand is elastic and prices increase, cost and revenues both decrease. If demand is elastic and prices decrease, costs and revenues both increase. As a result, we cannot tell about the effects on profits as it depends upon which change is the largest in each case.The reasoning is straightforward with inelastic demand. If prices increase, revenues will rise and costs will fall as the quantity produced falls. Thus, profits increase. With a price decrease, quantity increases. Costs surely increase. And since revenues fall, profits fall. A firm facing an inelastic demand will want to raise its price in order to maximize profits.
Explain why an effective minimum wage law that is not changed over time may eventually become ineffective as demand for workers increases.
If minimum wages doesn't increase, then the demand for worker will decrease. If the demand for workers increases, the quantity demanded at minimum wage will increase. Since the wages are stuck, there will be a surplus of workers but not enough money to make them want to work. So unemployment will increase.
Use the three sections at the end of the article to find examples of elastic and inelastic demand.
In paragraph 1, we learn that Ms. Fenton will make the switch. When the prices tripled, quantity demanded decreased by 10%, which means that it is an inelastic demand. In paragraph 2, owners of carts won't raise their praises because they think demand is elastic or they don't know what it is. In paragraph 3, the demand is inelastic because Ms. McLemore doesn't care about the price.
A major city was thinking about increasing its bus fares and commissioned a study to estimate the price elasticity of demand. The study estimated that elasticity was 0.4. What action should the city have taken to increase revenue from bus fares?
Increase fares Since 0.4 < 1, demand is inelastic. Therefore, in order to increase revenues, price should be increased.
If the income elasticity of a good is 0.8, what do we know about the good?
It is a normal good. With respect to income elasticity of demand, if the measure is positive, it is a normal good - i.e., income is increasing and quantity demanded is also increasing.
If you were selling a product with an elasticity of 1.6 and you wanted to increase your revenue, what should you do to the price?
Lower price If demand is elastic, consumers are very responsive to price changes, so the quantity change will outweigh the price change. So if you want revenue to increase, you should lower the price since the quantity increase will outweigh the price decrease.
Taxes:
Mandatory payments to governments from consumers and producers.
Can you give some examples of situations in which markets may not be efficient?
Monopolies sell lower amounts of quantity than what would be the efficient quantity.
If a man spends approximately 45% of his income on air travel and his sister only spends about 2% of her income on air travel (and that is the only difference), would the man's demand for air travel be less or more elastic than his sister's?
More Another determinant of elasticity is the percentage of one's income that is spent on a good. If someone spends a significant amount of their salary on a good, then they will probably be more sensitive to changing prices than someone who spends a small percentage of their income on a good. In the question given, the man spends a greater share of his income on air travel than his sister does and is probably more sensitive to changes in cost. Therefore, his demand for air travel will be more elastic than that of his sister.
What are the arguments in favor of raising the minimum wage? Against?
More workers will want to work but business would want to hire less. Unemployment would increase but the incomes of people got found jobs would increase.
Assume that as your income increases, your consumption of burgers decreases. We can assume that your income elasticity of demand for burgers is what?
Negative If consumption of burgers decreases as income increases, burgers must be an inferior good. The income elasticity of an inferior good is negative.
Would you recommend a price floor in this case? What is economically efficient? What is fair?
No, because the price floor isn't fair to the consumers. It also won' solve the issues there are in the market.
Subsidies:
Payments from governments to producers or consumers of specific goods and services.
In the question above, two years after the city raised fares, it noticed that revenues were decreasing. What could have happened over the two years to cause consumers to be more sensitive to the higher fares?
People could have stopped taking the bus and started to carpool instead.
An example of price controls given in your text concerns minimum wage increases. On a supply and demand diagram (with wages on the vertical axis and number of workers on the horizontal), would minimum wage be considered a price ceiling or a price floor?
Price floor A minimum wage is a minimum. Wages cannot be less than that minimum. Thus it is a floor.
It is claimed that price floors and price ceilings both reduce the actual quantity exchanged in a market. Use a diagram or diagrams to support this conclusion, and explain the common sense behind it.
Price floors and price ceilings ensure that we have market equilibrium. If buyers want to buy more that sellers want to sell, there is a shortage. If sellers want to sell more than buyers want to buy, there is a surplus.
Where should the market produce if it is allocatively efficient?
Quantity B An allocatively efficient quantity is the quantity at which the marginal cost of production equals the consumer's marginal benefit. In other words, it reflects the intersection between the marginal social cost curve and the consumer's demand curve, so B is correct.
Given these supply and demand curves, along with the social cost curve, what quantity of output would the private market produce?
Quantity C Private sellers and private buyers interact in markets to determine equilibrium quantities and prices. The existence of external costs does not change the decisions of either private sellers or private buyers.
"President Reagan proposed a lowering of the minimum wage for teenagers during the summer." Assume that there are normal demand and supply curves in the market for labor for both teenagers and adults and that the new, lower minimum wage is an effective one (below the old minimum wage, but still above what the equilibrium wage would be). What would be the effects of Reagan's proposal on the market for teenage labor? During the summer months, what would be the effects on the market for adult labor with skills similar to teenagers? Explain how you arrived at your answers.
Quantity demanded for teen labor would increase because wages decreased. However, the amount of teen willing to work would decrease. Teen wages fall to the new minimum wage. The demand for substitutes would decrease. Adult wages stay the same but unemployment rises.
A firm has a choice of raising or lowering its price. If the firm wishes to increase its revenues (the price times the quantity sold), what should it do?
Raise price when demand is inelastic, because the revenues gained from the price increase will be larger than the revenues lost from the smaller quantity sold. If a firm raises its price, then it will gain revenues from the higher price but lose revenues from the decrease in quantity demanded. If demand is inelastic, the percentage change in quantity will be less than the percentage change in price. The loss in revenues from the decrease in quantity will be less than the gain in revenues from the increase in price.
Is the demand for a container of salt likely to be inelastic or elastic? Why? Select all that apply.
Salt is a necessity, there are few substitutes, and the amount we spend on salt is a small portion of our incomes. All three characteristics will lead us to the conclusion that salt has an inelastic demand.
For a product with external costs, the social cost curve lies above the market supply curve. Explain why that is the case.
Say the supply curve is above the demand curve, the marginal cost in the supply curve would be greater than the demand curve at any quantity. To find out the social costs that are greater than private costs, the social cost has to be above the supply curve.
The government has an effective price ceiling in place. The government then decides to decrease the price ceiling by 20%. Describe 1) what will happen to quantity demanded and quantity supplied with this change, 2) how elasticity relates to the changes, and 3) the resulting effect on the market. Where is price relative to where the equilibrium price would be if there were no price controls?
Since the price ceiling is lower, the quantity demanded will increase. Quantity supplied will increase so producers can make a profit. The market will be elastic. The price is higher at the equilibrium.
Select the graph that best represents the effects in the milk market after an increase in the price of a substitute for milk.
Something causes prices for substitutes for milk to increase. As those prices rise, the demand for milk increases because a substitute is now more expensive. The graph shows demand for milk increasing only to an amount where the surplus is eliminated. The increase in demand could be less than that or more than that amount. It might be possible, if the increase in demand is large, that the price of milk increases beyond what it did with the milk price floor.
Which party is more elastic? The producers or the consumers?
The consumers have a greater absolute value of elasticity. In other words, they have a greater response to the price change.
Who is likely to be in favor of a price ceiling on a good?
The consumers of the good who can still purchase it after the ceiling is imposed The price ceiling means that not everyone who was buying the good will still be able to, so not all consumers will be happy - only those who can still buy it at the lower price.
Click on the graph that best represents an effective price floor.
The current price might be about $15.00 per 150 pounds of milk. The price floor might be set at a price of $20.00 per hundred pounds, a price that is above the current market equilibrium price. The effects of the effective price floor would be to create a higher market price, lower the quantity demanded, and increase the quantity supplied while lowering the quantity exchanged in this market.
What would happen to the store's total revenue with this 10 percent price increase if quantity falls by 5 percent?
The demand is inelastic. The price increase was greater than the decrease in quantity. The revenue needs to increase. We can find the initial revenue by multiplying the price of the iPods and the quantity of iPods and we get $20,000. Then we figure out the 10% increase in price by multiplying $200 x 10% to get $220. To find the new quantity, we multiply 5% X 100 to get 5 then subtract that from 100 to get 95. To find the new revenue we multiply the new price by the new quantity to get $20,900 which is a $900 increase from the initial revenue.
If a good has an income elasticity of 0.8, what do you expect to happen to the quantity demanded of this good if the country enters a recession?
The good is normal which means if income increases/ decrease the demand for it will so the same. In a recession, income decrease. Since the good is normal, the demand will also decrease.
Last October, the highest-paying passenger on United Flight 815 from Chicago to Los Angeles paid $1,248.51. The lowest-paying passenger on the same flight paid $87.21. Can we say anything about the likely elasticities of demand of the two customers? Use the concepts of marginal analysis and opportunity cost to explain why it might make sense for United Airlines to charge some lucky soul so little.
The highest paying customers demand is inelastic because they don't care about the price of their ticket. The demand for the lowest paying customer is elastic because they care more about the price of their ticket. They probably weren't able to afford a more expensive ticket so they bought the cheapest making their demand elastic.
The government creates an effective price floor. Describe how the market adjusts by putting the following statements in order.
The new minimum price is now above the equilibrium price. Producers are willing to supply more‚ but consumers would be willing to buy less. The difference between quantity demanded and quantity supplied after the price floor comes into effect creates a surplus in the market. The size of the surplus depends on the elasticity of the producers and consumers‚ the more elastic either party is‚ the greater the surplus.
If demand were elastic, an increase of 10 percent in the price might cause a 20 percent decrease in quantity demanded. What would happen to the total revenue in this case?
The new price would be $220 and the new quantity would be 80. Meaning that the new revenue is $17,600 which is a decrease of $2,400 from the initial revenue.
Income elasticity of demand:
The percentage change in quantity demanded of a good or service divided by the percentage change in income.
Price elasticity of demand:
The percentage change in quantity demanded of a good or service divided by the percentage change in price.
Price elasticity of supply:
The percentage change in quantity supplied divided by the percentage change in the price of the good or service.
Look at this graph, where the price ceiling is placed above the equilibrium price. Show the quantity supplied and the quantity demanded. Describe the situation.
The price ceiling is at $20. The equilibrium price is slightly above $15. At the ceiling, the quantity demanded is about $5,000 where the quantity supplied is about $9,700. There is a surplus in the market of about 4,700 bushels. This will cause the prices to decrease to the equilibrium. Since the ceiling price is above the equilibrium, it doesn't effect the market.
Think about supply and demand curves for cigarettes without the tax. Now assume that the tax will be enforced through the producers paying the government $1.10 for every pack of cigarettes sold. If the tax were added, what would happen to the price and quantity?
The quantity supplied would decrease causing the prices to increase by $1.10.
If the government taxes car producers, that will happen in the market for cars?
The supply curve will shift to the left. A tax on producers represents an increase in the cost of doing business, so supply would decrease, shifting the curve to the left
The Santa Fe minimum wage rose to $12.32 an hour in March 2021. Describe how you would draw the supply and demand diagram.
The supply of labor would increase since the price of wages increase. At high wages, businesses want use less labor and at lower wages they want to hire more people.
Suppose that there is currently a $2.00 per bottle tax on vodka that is levied on consumers. Legislators have decided to give consumers some relief by eliminating the tax. In order to keep tax revenues at their previous level, they decide to impose a $2.00 tax on producers. What is the net impact of these two actions?
There is no change in either consumers' or producers' well-being. The imposition of a tax on one side of the market results in a sharing of the burden, so both consumers and producers were already sharing the $2.00 tax.
If there is a drought, what would you expect to happen to farmers' revenues?
There will be a decrease in supply which will cause the farmers to increase the price of their good. If there is an inelastic demand for the goods, by increasing the price, the farmer is increasing their income.
Use supply and demand to support the arguments for and against raising the minimum wage.
There would an increase of labor supplied and a decrease in the quantity demanded for labor. This would result in a surplus of workers which is a surplus in unemployment. The quantity demanded of workers would get paid more.
Sometimes consumers purchase goods because of "conspicuous consumption"; i.e., they want others to know that they can afford to buy the goods. There are many examples of these goods, such as Rolex watches, Coach purses, and flying first class. What would you expect the income elasticity of demand to be for these goods?
These are luxury goods, so income elasticity would be greater than 1. If incomes increase, for example, then consumers are likely to disproportionately increase their spending on luxury goods to keep pace with those with their new, higher incomes.
List some things that influence how sensitive you are to changes in the prices of goods and services you purchase.
Well the first thing that is going to determine how sensitive I am to the changes in price is my income. Starbucks has raised the prices again and I am too broke to pay for it. Instead of going to Starbucks, I will go to sonic because it is a substitution
Assume demand is inelastic. Click the corresponding arrows to indicate how quantity, revenues, costs, and profit will be affected if prices are increasing or decreasing.
When consumers do not respond much to price changes, the price increase (or decrease) will be larger than the quantity decrease (or increase). So, revenue will move in the same direction that price does. At the same time, when quantity decreases, cost decreases, and when quantity increases, cost increases. So, we can tell that when demand is inelastic, profits will rise when prices rise. And when prices decrease, costs go up and revenues go down, and therefore profits have to decrease.
Assume that the elasticity of demand is 1.6. Is demand elastic or inelastic?
When elasticity is greater than 1, demand is elastic.
Why are the admission prices to Disneyland often discounted, but the price of concessions and souvenirs never discounted?
When prices of tickets are discounted, more people will go to Disneyland then they would when tickets were at the normal price. Since there are more people at Disneyland, in order to still receive a profit, they keep concessions and souvenirs at the same price. There will be more people purchasing concessions and souvenirs.
Explain in your own words what it means for demand to be elastic or inelastic.
When the demand is elastic, it means that the percent change in quantity demanded is greater than the percent change in price. When demand is inelastic, the percent change is quantity demanded is less than the percent change in price.
Is Figure 5.7 in violation of the law of demand?
Yes A decrease (increase) in price does not increase (decrease) quantity demanded. For any change in price there is no change in quantity demanded.
Why might demand for movies be more elastic in the summer than in the winter?
You can do more things in the summer than you can in the winter. Therefore there are a lot more substitutions for movies in the summer than there is in the winter.
A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues.
decrease If demand is elastic, consumers will respond disproportionately to price changes. If price increases, there will be a large effect on the quantity demanded, outweighing the price increase. If price increases, revenue decreases. If price decreases, quantity will increase by more, increasing revenue.
If the government is trying to raise as much revenue as possible, then the suppliers of ____________are more likely to have a tax imposed on their production.
gasoline The elasticity of demand for jewelry is more elastic than gasoline. The government would get more revenue from taxing a good that has an inelastic demand, such as gasoline, since the tax would lead to very small changes in consumption.
Given your answer to Question 13.04, what can you say about the social cost of production at that point, compared to the consumer's marginal benefit? The social cost of production is ______________ than the consumer's marginal benefit.
higher At the equilibrium market quantity, the total marginal cost of production, exhibited by the social cost curve, is greater than the consumer's marginal benefit (from the demand curve).
A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.
increase When demand is inelastic, a change in the price leads to a less than proportional change in quantity, so the effect of the price change is greater than the quantity change. If price increases, revenue increases. If price decreases, revenue decreases.
An increase in an effective minimum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.
increase; decrease A minimum legal price that is effective is one that is above the equilibrium price. An increase in that price floor will decrease quantity demanded and increase quantity supplied. The quantity demanded will be the amount actually exchanged, that is, demanded and supplied.
An increase in an effective maximum legal price will do what to prices and quantities actually sold in a market? Prices will __________ and the quantities actually sold will ___________.
increase; increase A maximum legal price that is effective is one that is below the equilibrium price. Because the maximum price is effective, the market price will increase. That increase in price will decrease quantity demanded and increase quantity supplied. The quantity supplied will be the amount actually exchanged, that is, supplied and demanded.
Prices should be ___________ (increased/decreased/not changed) in the winter and ___________ (increased/decreased/not changed) in the summer.
increased; decreased One way to solve the problem is to calculate total revenue for each possible price. But a simpler and more general way, and one that helps us understand the logic, is to determine if demand is elastic or inelastic. This is also the mathematical analysis that will lead us to an understanding of why revenues increase or decrease. In the winter, an increase in price from $8 to $9 is a 12.5 percent increase (((9-8)/8) x 100 = 12.5). Quantity falls by 4.5 percent (((21,000-22,000)/22,000) x 100). Thus, demand is inelastic (-4.5/12.5 = -0.36). The percentage change in price is larger than the percentage change in the quantity demanded. An increase in price will increase total revenues. The gain in revenues from the increased price is 12.5 percent. The loss in revenues from selling fewer tickets is 4.5 percent, and the net change on revenues is an increase. A decrease in price will decrease revenues. The loss in revenues from the price decrease will be 12.5 percent. The gain in revenues from selling more tickets will be 4.5 percent. Thus revenues will fall as a result of the price decrease when demand is inelastic. The conclusion is that the theater should increase its ticket prices if its goal is to maximize ticket revenues. In the summer, the same increase in prices will cause a 20 percent (((8,0000-10,000)/10,000)x100) fall in quantity demanded. Thus, demand is elastic (-20/12.5 = -1.6) because the percentage change in price is less than the percentage change in quantity demanded. Therefore, revenue will fall as the price is increased. Prices should be lowered in order to increase revenues.
Price floor:
legal minimum price. An effective price floor is a legal minimum price that is above the equilibrium. An example is the federal minimum wage, currently $7.25 per hour.
If the elasticity of supply were 1.5 instead of 2, the surplus in the market created by the price floor would be ______ before?
less than The price change would not have as much effect on quantity supplied, so the surplus would not be as great if the elasticity of supply was only 1.5
When will a minimum wage be an effective price control? When it is a _________.
minimum "price" that is above equilibrium price If the price floor is effective, it actually holds prices up. Thus, it must be above the equilibrium price. If it is below the equilibrium wage, the market wage is above the minimum and the minimum has no effect (is ineffective) on the wages that are paid.
The price elasticity of demand will be _________________ if demand is elastic.
more than one If demand is elastic, a change in price will cause a greater change in quantity. Specifically, a given percentage change in price will cause a larger percentage change in quantity demanded. Since price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price, the price elasticity of demand will be greater than one.
Situation A: When a $10 per unit tax is imposed on the producer of Bippies (a candy), the equilibrium price increases by $4.Situation B: When a $10 per unit tax is imposed on the producer of Bippies, the equilibrium price increases by $2.Based on the two situations above, Bippies in Situation A has a _________ elastic supply OR faces a _________ elastic demand than exists in Situation B.
more; less In situation A, the equilibrium price is higher than in situation B. Therefore, the supply in situation A must be more elastic and/or the demand in situation A must be less elastic than in situation B.
income elasticity=
percentage change in quantity demanded/percentage change in income
elasticity of supply=
percentage change in quantity supplied/percentage change in price
When price decreases, quantity increases. Price elasticity of demand measures how much ___________.
the quantity increases when price decreases Elasticity is a measure of responsiveness—when price changes, how responsive is quantity to that change?