Elasticity

Elasticity measures the behavioral response of economic agents in a given situation. Which question is likely to be answered using elasticity?

Does on-demand internet streaming media cause more people to stay home? If a business raises its prices, are they utilizing technology? 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 of up or down? (correct)

Teenage workers are assumed to have ___ labor supply, therefore a 5% increase in wage would result in ___ percentage change in quantity of labor supplied

Elastic, greater (correct) Elastic, less Inelastic, greater

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 less than the percentage change in price, the demand for that good or service is ________ and the price elasticity coefficient is ________

Elastic, greater than 1 Unitary, equal to 1 Inelastic, less than 1 (correct)

Inelastic demand or Inelastic supply

Elasticities that are less than 1 indicate low responsiveness to price changes and correspond to inelastic demand or supply

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 allows economists to measure

How firms can maximize profits The frequency of shifts in demand Responsiveness of one variable to changes in another variable (correct)

Elasticity refers to

How frequently a demand curve or supply curve changes slope How responsive one variable is to change in another (correct) How long it takes a market to reach equilibrium

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. Therefore the larger the share of an item in one's budget, the more price elastic demand is likely to be. By contrast, suppose the local grocery store increased the price of toothpicks by 50 percent. Since toothpicks represent such a small part of a consumer's budget, even a significant increase in price is likely to have only a small effect on demand. Thus, the smaller the share of an item in one's budget, the more price inelastic demand is likely to be

Unitary elasticities

Indicate proportional responsiveness of either demand or supply

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 (correct) Elastic, increased Inelastic, decreased

Elastic demand or Elastic supply

One in which the elasticity is greater than 1, indicating a high responsiveness to changes in price

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

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 decrease revenue?

Raise the price (correct) Keep the price the same Lower the price

Elasticity

Referred to as how much something will stretch or change in response to another variable

Zero elasticity or perfect inelasticity

Refers to the extreme case in which a percentage change in price, no matter how large, results in zero change in quantity supplied or demanded

Infinite elasticity or perfect elasticity

Refers to the extreme case in which either the quantity demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price at all. In both cases, the supply curve and the demand curve are horizontal, as shown in Figure 1, below

Cross-price elasticity of demand

Refers to the idea that the price of one good is affecting the quantity demanded of a different good. Specifically, the cross-price elasticity of demand is the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B

Demand "D" represents a demand curve that is (vertical line)

Relatively inelastic Perfectly elastic Perfectly inelastic (correct)

The price elasticity of demand measures the

Responsiveness of quantity demanded to a change in price (correct) Responsiveness of quantity demanded to a change in quantity supplied Responsiveness of price to a change in quantity demanded

Which of the following factors does NOT influence the price elasticity of demand of a product?

Short run versus long run (incorrect) Share of the consumer budget Slope of the supply curve

Given that total revenue = price x quantity, what will happen to total revenue if price increases when demand is elastic?

Stay the same Decrease (correct) Increase

Negative cross price elasticity of demand between two goods indicates that the two goods are

Substitutes Complements (correct) Inferior goods

If wage increases by 10%, a(n) ________ worker is likely to supply 7% more labor because elasticity of labor supply is assumed to be ________

Teenager, elastic Adult, inelastic Adult, elastic (incorrect)

Elasticity is relevant when trying to understand

The burden of taxes on consumers How a change in quantity demanded affects price and how a change in quantity supplied affects price How a change in price affects quantity supplied, how a change in price affects quantity demanded, and how raising a tax on a good affects the revenue from the tax (correct)

Normal goods

The income elasticity of demand is positive: that is, a rise in income will cause an increase in the quantity demanded

Wage elasticity of labor supply

The percentage change in hours worked divided by the percentage change in wages—will determine the shape of the labor supply curve

The elasticity of supply is defined as the

The percentage change in price divided by the percentage change in quantity supplied The percentage change in quantity supplied divided by the percentage change in price (correct) The change in quantity supplied divided by quantity supplied

income elasticity of demand

The percentage change in quantity demanded divided by the percentage change in income

Price elasticity of demand

The percentage change in the quantity of a good or service demanded divided by the percentage change in the price

Elasticity of savings

The percentage change in the quantity of savings divided by the percentage change in interest rates-will describe the shape of the supply curve for financial capital

Using the midpoints method, calculate the price elasticity of demand of Good X using the following information: When the price of good X is $50, the quantity demanded of good X is 400 units. When the price of good X rises to $60, the quantity demanded of good X falls to 300 units

The price elasticity of demand for good X=0.64 The price elasticity of demand for good X= 1.23 The price elasticity of demand for good X=1.57 (correct)

Total revenue

The price of an item multiplied by the number of units sold: TR = P x Qd

Price elasticity of demand (formula)

= Percentage change in quantity demanded / Percentage change in price

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

Perfectly elastic supply

Unrealistic; however, the curve can be explained using a little imagination. If supply is perfectly elastic, it means that any change in price will result in an infinite amount of change in quantity. Suppose that you baked delicious cookies and your costs, including inputs and time, were $3 per cookie. At $3, you would be willing to sell as many cookies as you could. You would not sell a single cookie if the price were any lower than $3, and if price were above $3, you would sell an infinite amount. In summary, your supply curve would be perfectly elastic at a price of $3, and any change in price would result in a change in quantity supplied to infinity or zero, depending on whether price increased or decreased, respectively

Inferior good

When the income elasticity of demand is negative. For example, those with a higher income might buy fewer hamburgers, because they are buying more steak instead

perfectly inelastic demand

An extreme case, necessities with no close substitutes are likely to have highly inelastic demand curves. This is the case with life-saving prescription drugs, for example. Consider a person with kidney failure who needs insulin to stay alive. A specific quantity of insulin is prescribed to the patient. If the price of insulin decreases, the patient can't stock up and save it for the future. If the price of insulin increases, the patient will continue to purchase the same quantity needed to stay alive. Perfectly inelastic demand means that quantity demanded remains the same when price increases or decreases. Consumers are completely unresponsive to changes in price

Perfectly Inelastic Supply

An extreme example, goods with limited supply of inputs are likely to feature highly inelastic supply curves. Consider housing in prime locations such as apartments facing Central Park in New York City or beachfront property in Southern California. If housing prices increase for beachfront property in Southern California, there is a fixed amount of land, and only so many houses can be squeezed in along the beach. If housing prices decrease for Central Park-facing apartments, sellers are not going to bulldoze the buildings. Perfectly inelastic supply means that quantity supplied remains the same when price increases or decreases. Sellers are completely unresponsive to changes in price

Perfectly elastic demand

An extreme example. Perfect elastic demand means that quantity demanded will increase to infinity when the price decreases, and quantity demanded will decrease to zero when price increases. When consumers are extremely sensitive to changes in price, you can think about perfectly elastic demand as "all or nothing." For example, if the price of cruises to the Caribbean decreased, everyone would buy tickets (i.e., quantity demanded would increase to infinity), and if the price of cruises to the Caribbean increased, not a single person would be on the boat (i.e., quantity demanded would decrease to zero)

When an income increases and demand for a good falls, the good is considered a

Complementary good Normal good Inferior good (correct)

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 Decrease, less* Increase, less (incorrect)