Econ Chapter 4: Elasticity

Elastic demand

% change in Qd (greater) / % change in price (less) Price elasticity of demand is greater than 1.

Perfectly elastic demand

% change in Qd (infinitely large) / % change in price (tiny) Price elasticity of demand is infinity (Demand for a good w/ a perfect substitute is perfectly elastic)

Inelastic demand

% change in Qd (less) / % change in price (greater) Price elasticity of demand is between 0 and 1. (Ex. food and shelter)

Formula for income elasticity of demand

% change in Qd / % change in income

Formula of cross elasticity of demand

% change in Qd / % change in price (of substitute or complement)

Unit Elastic demand

% change in Qd = % change in price Price elasticity of demand is 1.

Formula for price elasticity of demand

% change in Qd/ % change in price AKA (quantity change/avg. quantity demanded) x 100 Divided by AKA (price change/ave. price a unit) x 100

Formula of elasticity of supply

% change in Qs / % change in price

Calculate income elasticity of demand. Income changes from 2,000 to 3,000 Qd changes from 400 to 450

0.29

When the price of a meat pie rises by 4% and the quantity demanded of meat pies decreases by 3%, what is the price elasticity of demand for meat pies?

0.75 3% / 4%

3 Factors that influence the elasticity of demand

1. Closeness of substitutes 2. Proportion of income spent on the good 3. Time elapsed since the price change

2 Factors that influence the elasticity of supply

1. Resource substitution possibilities 2. Time frame for supply decision

Choose the statement that is INCORRECT. 1. Elasticity is reported using its magnitude 2. Elasticity is reported as a negative number because a positive change in price brings a positive change in the Qd 3. Elasticity is the ratio of two percentage changes 4. Elasticity is a units free measure

2 is incorrect

Choose the CORRECT statement. 1. The change in total revenue that arises from a price change is independent of the price elasticity of demand 2. A rise in price decreases total revenue 3. Total revenue from the sale of a good equals the price of the good times the quantity sold 4. A rise in price increases total revenue

3 is correct

Which of the following statements describes a perfectly inelastic demand? 1. The government is promoting generic drugs that are much cheaper 2. A large number of youngsters buy roses from Columbian rose-growers before Valentine's Day 3. I prefer taking the subway to work rather than driving because of high fuel prices 4. Walgreens does not find any change in the number of people buying colorthalidone after a 7% rise in its price

4. describes a perfectly inelastic demand

The demand for plums is unit elastic if _____.

A 5% rise in the price of plums results in a 5% decrease in the quantity of plums demanded.

Which of the following statements illustrates income elasticity of demand? A. A salary cut and no other changes has resulted in Mary buying less food B. Poor economic conditions are resulting in higher unemployment and lower aggregate demand C. A 2% fall in the price of peanuts increases Ralph's demand for almonds by 5% D. A rise in Annie's income by 5% decreases supply of canned fruits by 6%

A is correct

Price elasticity of demand

A units free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same

Gloria's gas station wants to increase the quantity of gasoline that it sells by 1%. The price elasticity of demand for gasoline sold by Gloria's gas station is 3.9. What is the percentage price cut that will achieve the firm's objective?

Answer: 0.26 percent 3.9 = 1% / x 3.9 = 0.01 / x 3.9x = 0.01 x times 100

The demand for air travel between two cities doubles. The elasticity of the supply of air travel between these cities will​ _______. A. Adjusts to become equal to the price elasticity of demand over time B. Become more​ elastic, the longer the time since demand doubled C. Not change over time D. Become less​ elastic, the longer the time since demand doubled

B is correct

Closeness of substitutes (E of demand)

Closer the substitutes for a good, more elastic the demand is

When the percentage change in the Qd = the percentage change in price, the demand curve is _____.

Curved toward the origin

Cassandra's demand for orange juice is price elastic. A severe frost destroys much of the Florida orange crop. Cassandra _____. A. Increases the amount that she spends on orange juice. B. Continues to spend the same amount on orange juice. C. Increases or decreases the amount that she spends on orange juice, depending on whether or not the grapefruit crop has also been affected D. Decreases the amount she spends on orange juice.

D is correct

Which of the following statements is an example of elasticity of supply? A. Farmers increase their supply of potatoes when the price of onions rises B. The quality of fruits sold by Safeway is getting better C. A 20% discount at all Old Navy stores is drawing large crowds D. A 10% fall in the price of turkey, with no other changes, decreases Qs by 12%

D is correct

Resource substitution possibilities (Elasticity of supply)

Easier to substitute = greater elasticity

The closer the substitutes for a good or service, the more _____ is demand. The greater the proportion of income spent on a good, the more _____ is demand. The longer the time that has elapsed since a price change, the more _____ is demand.

Elastic, elastic, elastic

If demand is unit elastic, a 1% price cut increases quantity sold by _____ and total revenue _____.

Exactly 1% and total rev. does not change.

A decrease in tuition fees will decrease your college's total revenue if the price elasticity of demand for college education is _____.

Greater than 0 and less than 1

If supply is perfectly elastic, supply curve is _____ and elasticity of supply is _____.

Horizontal and infinite

An advance in technology lowers the price of a laptop. If the demand for laptops is price inelastic, the quantity of laptops sold will _____ and total revenue will.

Increase; fall

Your expenditure and elasticity Elastic demand, expenditure _____. Inelastic demand, expenditure _____. Unit elastic demand, expenditure _____.

Increases Decreases Stays same

When Mohesha receives an increase in her pay check from​ $1,800 a month to​ $2,200 a​ month, she increases the quantity of hot chocolate that she buys from 19 cups a month to 21 cups a month. Mohesha's demand for hot chocolate is income​ ______. For​ Mohesha, hot chocolate is​ ______ good.

Inelastic; normal good

If demand is inelastic a 1% price cut increases quantity sold by _____ than 1% and total revenue _____.

Less than 1% and total rev. decreases

If supply is unit elastic, supply curve is _____ and passes through _____.

Linear and passes through the origin. Slope is irrelevant.

Time elapsed since price change

Longer time since a price change, more elastic is the demand

Which of the following statements describes an elastic demand?

Mary's quantity demanded decreased by 8% when the price of milk rose by 5%.

Cross elasticity of demand

Measure of responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same.

Income elasticity of demand

Measures how quantity demanded responds to a change in income, other things remaining the same.

Elasticity of supply

Measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same

Proportion of Income spent on the good

More income spent, more elastic is the demand

If demand is elastic a 1% price cut increases quantity sold by _____ than 1% and total revenue _____.

More than 1% and total rev. increases

Time frame for supply decision (Elasticity of supply)

More time that passes after a supply change = greater elasticity

Long run supply

Most elastic

Ski trips and ski jackets are complements. The cross elasticity of demand for ski trips with respect to the price of a ski jacket is _____.

Negative

Rice and noodles are substitutes. The cross elasticity of demand for rice with respect to the price of noodles is ______.

Positive

If the Qd of noodles decreases by 2% when the price of noodles rises by 4%, what is the price elasticity of demand for noodles? Based on the number you've calculated, the demand for noodles is _____.

Price elasticity of demand = 0.5 Inelastic

Total Revenue =

Price of a good x the quantity sold

Perfectly Inelastic demand

Qd remains constant when price changes Price elasticity of demand is 0. (Rep. as a vertical line)

Short run supply

Somewhat elastic

If cross elasticity of demand is positive, the goods are _____. If cross elasticity of demand is negative, the goods are _____.

Substitutes Complements

Momentary Supply

Supply when no adjustments can be made to the influences of supply (Can be perfectly elastic or inelastic)

Magntitude

The absolute value. Used to see how responsive the Qd is and compare price elasticities of demand

If supply is perfectly inelastic, supply curve is _____ and elasticity of supply is _____.

Vertical and 0.

Supply is perfectly inelastic and the supply curve is​ ______.

Vertical when the quantity supplied is fixed regardless of the price

Price elasticity of demand _____.

and the slope of the demand curve are two different concepts