Chapter Six: Elasticity
Cross-price elasticity of demand
a measure of the effect of the change in the price of one good on the quantity demanded of the other; it is equal to the percent change in the quantity demanded of one good divided by the percent change in the price of another good.
Price elasticity of supply
a measure of the responsiveness of the quantity of a good supplied to the price of that good; the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve
Midpoint method
a technique for calculating the percent change in which changes in a variable are compared with the average, or midpoint, of the starting and final values.
If a change in price causes total revenue to change in the same direction, we can conclude that the demand is:
price inelastic.
Perfectly elastic demand
the case in which any price increase will cause the quantity demanded to drop to zero; the demand curve is a horizontal line.
Suppose that an increase in the price of a good leads to an increase in total revenue. Ignoring other factors (like supply), at its current price the good must be:
price-inelastic.
Price elasticity of demand
the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve
Total revenue
the total value of sales of a good or service (the price of the good or service multiplied by the quantity sold).
Gas prices recently increased by 25%. In response, purchases of gasoline decreased by 5%. According to this finding, the price elasticity of demand for gas is:
0.2.
Suppose the price of university sweatshirts increases from $10 to $20 and the quantity supplied increases from 20 to 30. The price elasticity of supply, using the midpoint formula, is:
0.60.
If the price of a good increases by 20% and the quantity demanded changes by 15%, then the price elasticity of demand is equal to
0.75
The price of notebooks is $5, and at that price consumers demand 12 notebooks. If the price rises to $7, consumers will decrease consumption to 4 notebooks. Using the midpoint formula, what is the price elasticity of demand for notebooks?
3
There are several close substitutes for Bayer aspirin but fewer substitutes for a complete medical examination. Therefore, all other things equal, you would expect the demand for:
Bayer aspirin to be more price-elastic.
The price elasticity of demand for fresh tomatoes has been estimated to be 2.22. If a new insecticide and fertilizer treatment yields a 20% increase in the nation's fresh tomato crop, how will that affect total revenue from fresh tomatoes, all other things unchanged?
Total revenue will rise.
The price elasticity of demand can be found by:
comparing the percentage change in quantity demanded to the percentage change in price.
The price elasticity of demand along a demand curve with a constant slope:
decreases in absolute value as quantity demanded rises.
A men's tie store sold an average of 30 ties per day at $5 per tie but sold 50 of the same ties per day at $3 per tie. The price elasticity of demand, by the midpoint method, is:
equal to 1.
A major state university in the South recently raised tuition by 12%. An economics professor at this university asked his students, "How many of you will transfer to another university because of the increase in tuition?" One student in about 300 said that he or she would transfer. Based on this information, the price elasticity of demand for education at this university is:
highly inelastic.
The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, all other things unchanged, demand will:
increase by about 2.9%.
If the price of chocolate-covered peanuts increases and the demand for strawberry licorice twists increases, this indicates that these two goods are:
substitute goods.
Since the price of walnuts increases as the demand for cashews increases, we can assume that these two goods are:
substitutes
Perfectly elastic supply
the case in which even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite; the perfectly elastic supply curve is a horizontal line.
Income-elastic demand
the case in which the income elasticity of demand for a good is greater than 1.
Income-inelastic demand
the case in which the income elasticity of demand for a good is positive but less than 1.
Unit-elastic demand
the case in which the price elasticity of demand is exactly 1.
Elastic demand
the case in which the price elasticity of demand is greater than 1.
Inelastic demand
the case in which the price elasticity of demand is less than 1.
Perfectly inelastic supply
the case in which the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied; the perfectly inelastic supply curve is a vertical line.
Perfectly inelastic demand
the case in which the quantity demanded does not respond at all to changes in the price; the demand curve is a vertical line.
A good is likely to have an inelastic demand curve if:
the good has few available substitutes.
Income elasticity of demand
the percent change in the quantity of a good demanded when a consumer's income changes divided by the percent change in the consumer's income.
