ECON003 Chapter 7

How do you calculate price elasticity of supply?

%change Qs/ %change P

How to calculate income elasticity

%changeQD/ %change income (I)

how to calculate elasticity of demand

%changein QD / %change P

Type of income elasticity for: -normal good -Necessity -luxury -inferior good

-positive income elasticity -between 0 and 1 ->1 -negative income elasticity

When the price of Nike tennis shoes goes from $30 to $20, the quantity demanded increases from 10 to 40. Over this price range, the absolute value of the price elasticity of demand is

3 (doing it from scratch since percent isn't given)

Describe elasticity when calculating elasticity of demand

>1 elastic =1 unitary elastic <1 inelastic

Eric Cartman recently received a 10 percent increase in his income. His purchase and consumption of the snack food "Cheezy Poofs" has since increased by 25 percent. Eric Cartman's income elasticity for Cheezy poofs is A. -2.5, making cheezy poofs an inferior good for Cartman B. 2.5, making cheezy poofs a necessity for Cartman C. 2.5, making cheezy poofs a luxury for Cartman D. 0.40, making cheezy poofs a necessity for Cartman

C

Suppose you are managing a clothing store and you plan to increase revenues by increasing the price of the clothing that you sell. What must the absolute value of the price elasticity of demand for the clothing in your store be in order for your plan to make sense? A. greater than 1 B. equal to 1 C. less than 1 D. perfectly elastic

C

UCR is selling tickets to its softball game against Long Beach State and is trying to maximize its revenue from the game. What should UCR do to maximize its revenue? A. Raise ticket prices to get more revenue from each ticket sold B. Lower ticket prices to get more people to attend the game C. It's impossible to know without more information.

C.

UCR is selling tickets to its softball game against Long Beach State and is trying to maximize its revenue from the game. What should UCR do to maximize its revenue? A. Raise ticket prices to get more revenue from each ticket sold B. Lower ticket prices to get more people to attend the game c. Raise ticket prices for parents of players who desire greatly to see the game, and lower prices for the general public who have less of a vested interest in the game.

C.

Which of the following mysteries does the law of diminishing marginal utility help explain? A. Why diamonds, which are not necessary for our survival, are so expensive and water, which is essential for life, is so cheap. B. Why some people cheat on their spouse, who they love more than anybody else in the world. C. Why the top professional wrestlers and actors get paid more than the top teachers and nurses. D. All of the above

D. a. You use water, and have access to water at all times. b. After being with someone for so much, you don't want to be with them c. Nurses and teachers skills are a lot more common than wresters and actors

How do you calculate total revenue (or expenditures)?

Price x Quantity But as price increases, the quantity sold decreases

2nd determinant of price elasticity of demand

Products share of the consumers total budget The larger the share of the budget, the higher the elasticity

What is true regarding the price elasticity of supply?

The price elasticity of supply is always positive.

Law of Diminishing Marginal Utility

as the consumption of a product increases, the marginal utility derived from additional consumption will eventually decline ex. buffet ex. listen to fav song

2nd Law of demand

When the price of a product increases, consumers will reduce their consumption by a larger amount in the long run than in the short run

How do we come up with the market demand curve?

add up what the individuals want at a specific price, and add them up to set the curves ex. luigi and Mario

income effect

as if your real income has increased ex. if we woke up and everything in the world was half off.

1st determinant of price elasticity of demand

availability of substitutes. Good subs =higher elasticity The more narrowly defined the product is, the more elastic it is since it has more good substitutes

The more elastic the supply of a product, the more likely it is that the

burden of a tax on the product will fall on buyers.

How do you increase total revenue?

depends on elasticity if inelastic: price effect dominates if elastic: quantity effect dominates if Unitary elastic: effects are the same (no change in total rev)

If a Pizza Hut restaurant near campus reduces its pizza prices by 15 percent, and as a result, its total revenue from pizza sales increases, this indicates that the price elasticity of demand was

elastic

What does each type of elasticity look like?

elastic = horizontal line inelastic = vertical line unitary elastic = down, slope right

What happens to marginal benefit as you move down on the demand curve?

goes down

The price of elasticity of supply will be _______ in the long run

greater

Price Elasticity of Supply

measures how responsive suppliers are to a change in price

Income elasticity of demand

measures the responsiveness of the demand for a good to a change in income

The number of protective face masks purchased increased by 5 percent when consumer income increased by 10 percent. Assuming other factors are held constant, protective face masks would be classified as

necessity

What kind of answer do you get after calculating elasticity of demand?

negative, so we use the absolute value of that number

People will buy more (less) of a good as

price of the good decreases (increases)

Marginal Utility

the benefit derived from consuming an additional unit of good -additional feeling of happiness

substitution effect

the good has become cheaper relative to other goods ex. buying beef vs chicken. Beef is cheaper so it's cheaper than chicken

According to the income effect, when the price of automobiles rises, people buy fewer automobiles because

the purchasing power of their income is reduced.

When the Price of a good decreases, what happens?

the substitution effect and the income effect

income elasticity determines

the type of good

How do you calculate elasticity of demand from scratch? (you just have graph

use midpoint formula: ((Q0-Q1)/(Q0+Q1))/((P0-P1)/(P0+P1))