1.13 Elasticity

What are the 3 time-dependent supply curves that must be considered when evaluating how the length of time following a price change affects the elasticity of supply?

(1) Momentary supply (2) Short-term supply and (3) Long-term supply

What are 3 factors that influence the elasticity of demand?

(1) The availability and closeness of substitute goods, (2) The relative amount of income spent on the good, and (3) The time that has passed since the price change of the good.

When is cross elasticity negative?

Cross elasticity is negative when 2 goods are complements.

When 2 goods are reasonable substitutes for each other, cross elasticity is what?

Cross elasticity is positive.

Cross elasticity of demand formula?

Cross elasticity of demand = (% change in quantity demanded)/ (% change in price of substitute or complement)

When the portion of consumer budgets spent on a particular good is relatively small, demand for that good will tend to be relatively (inelastic/elastic)?

Demand for that good will tend to be relatively inelastic.

If a large percentage price change results in a small percentage change in quantity demanded, demand is said to be what?

Demand is said to be relatively inelastic.

What are the 2 factors that influence the elasticity of supply?

(1) The available substitutes for resources (inputs) used to produce the good and (2) The time that has elapsed since the price change.

What is a normal good?

A good that has positive income elasticity, which means that as income increases, demand for the good increases.

A perfectly inelastic demand curve is what?

A perfectly inelastic demand curve is vertical, and elasticity is zero. If the price changes, there will be no change in the quantity demanded.

An inferior good has what?

An inferior good has negative income elasticity.

What is an example of complements?

Automobiles and gasoline.

Bread and tobacco are generally considered what type of goods?

Bread and tobacco are generally considered normal goods.

What are examples of inferior goods?

Bus travel and generic margarine

What is the "total revenue test"?

If an increase in price increases total revenue, then demand is inelastic. If total revenue moves inversely to price, then demand is elastic at the current price.

Normal goods that have relatively low income elasticities are considered what?

Income elasticities (between 0 and +1) are considered "necessities."

What is the common use of elasticity?

It is commonly used as a measure of how sensitive the quantity demanded is to changes in the price of a good.

What does "Cross elasticity of demand" measure?

It measures the change in the demand for a good in response to the change in price of a substitute or complementary good.

What is "Momentary supply"?

It refers to the change in the quantity of a goods supplied immediately following the price change. When producers cannot change the output of a good immediately, the momentary supply curve is vertical or nearly vertical, and the good is highly inelastic. Grapes and oranges are examples of goods for which the quantity produced cannot be immediately changed in response to price changes.

What is "Short-term supply"?

It refers to the shape a supply curve takes on as the sequence of long-term adjustments are made to the production process. Manufacturing firms will adjust the amount of labor they use in response to a price change. As time passes, additional adjustments may be made, such as technological innovations and training new workers, which will further change the shape of the supply curve, making it more elastic the longer the adjustment period.

What is "Long-term supply"?

It refers to the shape of the supply curve after all of the possible ways of adjusting supply have been employed. This may involve building new factories or distribution systems and training workers to operate them. Typically, long-term supply is more elastic than short-term supply, which is more elastic than momentary supply.

A perfectly elastic demand curve is what shape?

It's the shape of a horizontal line, and its elasticity is infinite. If the price increases, quantity demanded goes to zero.

When a good or service can only be produced using unique or rare inputs, the elasticity of supply will be high or low?

Low

Normal goods with high income elasticities (values greater than 1) are generally considered what type of goods?

Luxury goods

What concepts are essential to understanding the efficient allocation of productive resources?

Marginal benefit, marginal cost, consumer surplus, and producer surplus.

At point (A) in a higher price range, the price elasticity of demand is greater than at point (C) in a lower price range.

OK

The price elasticity of demand measures what?

The PED measures the change in the quantity demanded in response to a change in market price (i.e. a movement along a demand curve).

If a small percentage price change results in a large percentage change in quantity demanded, the demand for that good is said to be what?

The demand for the good is said to be highly elastic.

What is the "income elasticity of demand"?

The income elasticity of demand measures the sensitivity of the quantity of a good or service demanded to a change in a consumer's income.

Elasticity is a measure of the ratio of the percentage change in one variable to the percentage change in what?

The percentage change in another variable.

The price elasticity of demand for most products is greater in the long run than in the short run: T/F?

True

Do agricultural goods such as sugar and rice have highly elastic (nearly horizontal) supply curves?

Yes