Chapter 5

For cross-price elasticity, if the products are compliments... then...

the cross-price elasticity of demand will be negative. Example: tablet computers and applications downloaded from online stores

A round-trip unrestricted fare about $2,000 between Cleveland and Los Angeles has been offered a $716 unrestricted fare in teh market by Continental Airlines. Though it resulted inthe same revenue, Contintental thinks it will have collected with its high fare. What is the absolute value of the price elasticity of demand on this airline route? a) less than 1 b) approximately 1 c) 0 d) greater than 1

b) approximately 1

Look at Figure 6.1 - The section of the demand curve labeled "A" represents a) the perfectly elastic section of the deamnd curve b) the elastic section of the demand curve c) the unit-elastic section of the demand curve d) the inelastic section of the demand curve.

b) the elastic section of the demand curve

Last year, John bought 50 pounds of hamburgers when his household income was $40,000. This year, his household income was only $30,000 and John bought 60 pounds of hamburgers. Holding everything else constant, John's income elasticity for demand is a) negative, so john considers hamburgers to be a normal good b) positive, so john considers bhamburgers to be an inferior good c) positive, so john considers hamburgers to be a normal good and a necessity d) negative, so john considers hamburgers to be an inferior good

d) negative, so john considers hamburgers to be an inferior good

If demand is unit-elastic

- then an increase/decrease in price doesn't affect revenue because that the decrease/increase in quantity demanded is proportionally the same as the increase/decrease in price.

For cross-price elasticity, if the products are substitutes... then...

the cross-price elasticity of demand will be positive. Example: two brands of tablet computers

For cross-price elasticity, if the products are unrelated... then...

the cross-price elasticity of demand will be zero. Example: tablet computers and peanut butter.

How does an non-constant elasticity affect the demand curve?

At the start of a non-linear curve, demand will be more elastic; in the middle it will be unit-elastic; at the end, it will be inelastic. This shows revenue will increase and decrease; and Qd/Qp is inversely related.

Define Total Revenue

The total amount of funds a seller receives from selling a good/service, calculated by multiplying price per unit by the number of units sold. Equation: TR = Price (P) x Quantity (Q)

In order to prove that Goody's Headache Powder and BC Pain reliever are substitutes, one should measure the _____________ and get a _______________. a) cross-price elasticity; positive number b) cross-price elasticity; negative number c) price elasticity of demand; number greater than 1 (absolute value) d) price elasticity of demand; number less than 1 (in absolute value)

a) cross-price elasticity; positive number

Which of the following pairs of goods is likely to have a negative cross-price elasticity of demand? a) pancakes and syrup b) oragne juice and grapefruit c) peanuts and cat food d) hot dogs and hamburgers

a) pancakes and syrup

Holding everything else constant, the demand for a good tends to be more elastic a) the more substitutes there are for the good b) the more consumers perceive the good to be a necessity c) the shorter time period involved d) the less important the product is in a consumer's budget

a) the more substitutes there are for the good

What is the price elasticity of demand equation?

(Q2 - Q1) (P2-P1) _________ divided by _________ ((Q2 + Q1)/2)) ((P1+P2)/2))

Determinants of Price Elasticity of Supply are

- the willingness of the firm to alter the quantity they produce as price increases

If demand is inelastic...

- then an increase in price increases revenue because the decrease in quantity demanded is proportionally smaller than the increase in price - then a decrease in price reduces revenue because the increase in quantity demanded is proportionally smaller than the decrease in price

If demand is elastic...

- then an increase in price reduces revenue because decrease in quantity demanded is proportionally greater than the increase in price. - then a decrease in price increases revenue because decrease in quantity demanded is proportionally greater than the decrease in price.

What are five key determinants of the price elasticity of demand? (Hint - causes #s to be elastic/inelastic)

1. Availability of close substitutes (will make it elastic) 2. Passage of time (if more time passes, it will be more elastic) 3. Luxuries vs necessities (demand curve for luxury is more elastic b/c items like bread will always be needed, hence it being inelastic) 4. Definition of the market (more narrowly market is defined, more elastic it will be; gas will always be more likely inelastic, but if your raise the price of it, they will find others to buy it from, hence elasticity) 5. Share of the good in consumer's budget (larger/more expensive items will be more elastic b/c they take a larger share of the consumer's budget)

What are important things to note for Price Elasticity of Demand?

1. Quantity is at the top of the equation 2. Price is inversely related to quantity, thus explaining the negative answer for price elasticity of demand 3. Not always shown as negative

Define Elasticity

A measure of how much one economic variable responds to change in another economic variable

Define Income Elasticity of Demand

A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income. Equation: % change in quantity demanded / percentage change in income

How does slope relate to elasticity?

Although elasticity and slope are not the same thing, when demand curves intersect, the one with the smaller slope (the flatter demand curve) is more elastic and the one with the larger slope (the steeper demand curve) is less elastic.

If demand is elastic and price increases, what happens to total revenue

Decreases in TR will result

Define Elastic Demand

Demand is elastic when the percentage change in quantity demanded is greater than the percentage change in price, so the price elasticity is greater than 1 in absolute value. - |Ped| >1 - more responsive to change in price

Define Inelastic Demand

Demand is inelastic when the percentage change in quantity demanded is less than the percentage change in price, so the price elasticity is less than 1 in absolute value. - |Ped|< 1 - less responsive to change in price Ex: Gas --> Ped = (-5%)/(+35%) = (consumption)/(price) = inelastic; note that gas is a necessity and therefore doesn't usually change price.

Define Unit-Elastic Demand

Demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price, so the price elasticity is equal to 1 in absolute value. - |Ped| = 1

If supply's value is greater than one, then the elasticity of supply is ___________

Elastic

What is important to note about price elasticity of demand for breakfast cereal?

If the price of all types of cereal increase by 10%, demand for all breakfast cereal will be inelastic.

If demand is inelastic and price increases, what happens to Total revenue?

Increase in TR will result

If supply's value is less than one, then the elasticity of supply is ___________

Inelastic

Why is Income elasticity of demand important?

It allows us to understand the effect of price when the government puts a stimulus.

What is the midpoint formula and what is it used for?

It is used to ensure that we have only one value of the price elasticity of demand between the same two points on a demand curve. It is the average of the initial and final quantities and the initial and final prices. *NOTE - it isn't the slope, but it's the "cousin" of it.

Is elasticity constant along a demand curve?

No it is not; at the top of the demand curve (where price is highest), it is elastic. In the middle of the curve it is unit-elastic. At the bottom of the curve (where price is lowest), it is inelastic.

If supply's value equals infinity, then the elasticity of supply is ___________

Perfectly elastic (also an economic tool)

If supply's value is zero, then the elasticity of supply is ___________

Perfectly inelastic

How is price elasticity of demand different than slope of demand curve?

Price elasticity of demand ISN'T the same as slope of the demand curve. Slope is calculated using quantity and price; elasticity is calculated using percentage changes.

How common is perfectly inelastic curves?

Rare and almost never occur, even if it is with gasoline. Demand for necessities such as natural gas and water is price inelastic.

How do you find out TR before and after price cut?

TR before price cut = C + D TR after price cut = D + E

What happens to TR when demand is inelastic and price decrease?

TR decrease; this means you sold, but not enough, therefore you lost a box which means you lost sales.

What happens to TR when demand is elastic and price decrease?

TR increases; this means you sold, but lost a box. Even though you lost that box, you earned more revenue.

An ice-cream shop increased their prices by 10% and saw an increase in total revenue. What does this indicate? a) the quantity demanded increased by less than 10% b) the quantity demanded decreased by less than 10% c) the quantity demanded increased by more than 10% d) the quantity demanded decreased by more than 10%

b) the quantity demanded decreased by less than 10%

Define Perfectly Elastic Demand

The case where the quantity demand is infinitely responsive to price and the price elasticity equals infinity. - it's equal to infinity & is vertical - an increase/decrease in price & the quantity demanded unchanged causes it - is an economic tool

Define Perfectly inelastic demand

The case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero. - it's equal to 0 & is horizontal - an increase in price causes quantity demanded to fall to 0 - is an economic tool

How does elasticity affect the disappearing family farms?

The demand for wheat in farms is inelastic because the income elasticity of demand is low, thereby causing a lower price in wheat. With that being said, income elasticity of demand is positive, but small. This is largely due to an increase in technology.

Define Cross-Price Elasticity

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. This enables us to quantify a relationship between quantity demanded of one good with quantity demanded of another good. Equation: % change in QD of one good / % change in price of another good

Define Price Elasticity of Demand

The responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price. Equation --> Percentage change in quantity demanded/percentage change in price

Define Price Elasticity of Supply

The responsiveness of the quantity supplied to a change in price, measured by dividing the percentage change in quantity supplied of a product by the percentage change in the product's price. Equation: Percentage change in quantity supplied / percentage change in price NOTE - This will always be positive because supply slope is positive

If supply's value is equal to one, then the elasticity of supply is ___________

Unit-Elastic

The price elasticity of supply of hot dog buns is estimated to be 1.5. Holding everything else constant, this means that a 10% decrease in the price of hot dog buns will cause the price of hot dog buns supplied to decrease by a) 15 percent b) approximately 5 percent c) approximately 25 percent d) 1.5 percent

a) 15 percent

Calculate the income elasticity if a 4% increase in income leads to an 8 percent increase in quantity demanded for organic produce, and a 6 percent increase in price. a) 2 b) -0.66 c) 0.5 d) 1.5

a) 2

Suppose that when the price of online music rose by 10%, the quantity of online music sold fell 6%. This indicates that demand is: a. perfectly inelastic b. inelastic c. elastic d. unit-elastic

b. inelastic

Compared to a necessity such as toothpaste, the price elasticity of demand for a boat is a) larger than the absolute value b) smaller than the absolute value c) at least twice as large in absolute value d) equal

a) larger in absolute value

The larger the share of a good in a consumer's budget, holding everything else constant, the a) more unit-elastic is a consumer's demand b) more price inelastic is a consumer's demand c) more price elastic is a consumer's demand d) more vertical is a consumer's demand curve

c) more price elastic is a consumer's demand

If the demand for water park tickets is unit-elastic, then... a) quantity demanded does not respond to changes in price b) the percentage change in quantity demanded is 1 percent greater than the percentage change in price c) the percentage change in quantity demanded is equal to the percentage change in price. d) the percentage change in quantity demanded is 100 percent greater than the percentage change in price (in absolute value)

c) the percentage change in quantity demanded is equal to the percentage change in price.

Assume that you own a small care repair business. In an attempt to raise revenue you increase your rates by 10%. However, your revenue falls. What does this indicate about the demand for your repair business? a) demand is perfectly elastic b) demand is perfectly inelastic c) demand is inelastic d) demand is elastic

d) demand is elastic

Holding everything else constant, the absolute value of the price elasticity of demand for Adidas tennis shoes is ______ the price elasticity of demand for tennis shoes in general. a) less than b) equal to c) twice as great as d) greater than

d) greater than

If the income elasticity of demand is negative, then the good is _________. Also give an example

inferior example: high-fat meat

If the income elasticity of demand is positive but greater than one, then the good is _________. Also give an example

normal and a luxury ex: high-end jewelry or a boat

If the income elasticity of demand is positive but less than one, then the good is _________. Also give an example

normal and a necessity ex: bread

If demand is unit-elastic and there is no change in price, then what happens to total revenue?

nothing will result