Principles ofEconomicsII Model 10:

The percentage change in quantity demanded of one good or service divided by the percentage change in the price of a related good or service is the:

cross-price elasticity of demand.

If the price of golf clubs increases by 10% and the cross-price elasticity between golf clubs and golf balls is -3, then the demand for golf balls will _______ in response.

decrease Cross-price elasticity is the percent change in the demand for golf balls divided by the percent change in the price of golf clubs. If the cross-price elasticity is -3, the demand for golf balls will decrease by 30% if the price of clubs increases by 10%.

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.

Income-elastic demand

the case in which the income elasticity of demand for a good is greater 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.

True or False? If Sally's income elasticity for CDs is 1.4, CDs are a necessity for Sally.

False CDs are a luxury for Sally because her income elasticity is greater than 1.

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.

When the supply curve is horizontal, supply is _______.

perfectly elastic When supply is perfectly elastic a very small change in the price will lead to very large changes in the quantity supplied, which is represented by a horizontal supply curve.

If the price of chocolate-covered peanuts increases and the demand for strawberry licorice twists increases, all else equal, this indicates that these two goods are:

substitute goods.

Suppose the price of real estate increases by 37.11% in Oakland next year. If the quantity of new homes supplied does not change, all else equal, this means that the price elasticity of _____ will be perfectly _____ in Oakland next year.

supply; inelastic

Income effect

the change in the quantity of a good consumed that results from the change in a consumer's purchasing power due to the change in the price of the good.

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.

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 (dropping the minus sign)

The cross-price elasticity of demand for Coke with respect to the price of Pepsi has been estimated to be 0.61. If the price of Pepsi falls by 10% in a period, how will that affect the demand for Coke in that period, all other things unchanged?

The quantity demanded of Coke will decrease by 6.1%.

Suppose that the cross-price elasticity between Honda Civics and Toyota Camrys is 2.0. If Honda increases the price of a Civic by 10%:

Toyota will sell 20% more Camrys. Cross-price elasticity is the percent change in the demand for Camrys divided by the percent change in the price of Civics. If the cross-price elasticity is 2.0, the demand for Camrys will increase by 20 percent if the price of Civics increases by 10%.

True or False? The supply of gasoline is more elastic over a period of 2 years than 2 days.

True Supply is more elastic if producers have more time to adjust to a price change.

True or False? Cross-price elasticity of demand is equal to the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good

True The cross-price elasticity measures the effect of a change in the price of one good on the demand of another good.

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.

If the income elasticity for food is 0.6 and income decreases by 5%, the quantity of food demanded will _____ by _____%.

decrease; 3. The income elasticity is the percent change in demand divided by the percent change in income, so if income decreases by 5%, the demand for food must decrease by 3% to produce an income elasticity of 0.6.

The price of aspirin recently decreased by 10%. If the price elasticity of supply of aspirin is 0.7, the quantity supplied will ________ by ________.

decrease; 7% The price elasticity of supply is the percent change in the quantity supplied divided by the percent change in the price. If the elasticity is 0.7 and the percent change in the price is -10%, the percent change in the quantity supplied must be - 7%% so that -7%/-10% = 0.7.

A hotel has a capacity of 100 rooms in the short run. Which statement best describes the short-run elasticity of supply for rooms at this hotel?

e elasticity of supply is zero in the short run because the short-run supply curve is vertical.

For which pair is the cross-price elasticity of demand most likely a large, positive number?

french fries and onion rings

The percentage change in the quantity demanded of a good divided by the percentage change in income is __________.

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

Suppose that the price elasticity of supply of beef is 2. If the price of beef increases by 20%, the quantity supplied will:

increase by 40%. The price elasticity of supply is the percent change in the quantity supplied divided by the percent change in the price. If the elasticity is 2 and the percent change in the price is 20%, the percent change in the quantity supplied must be +40% so that 40%/20% = 2.0.

If two goods are complementary, one can assume that the cross-price elasticity of demand for these goods is:

less than 0.

If the income elasticity for steak is 1.2, and incomes increase by 10%, the demand for steak will ______.

ncrease The income elasticity is the percent change in demand divided by the percent change in income. In this case, the demand for steak will increase.

Eric's income increased from $40,000 to $50,000 per year. All other things equal, Eric's consumption of tickets to pro football games increased from two to four per year. Using the midpoint formula, his income elasticity of demand for pro football game tickets is equal to _____, and football game tickets are _____ goods.

+3; normal

Total revenue

the total value of sales of a good or service (the price of the good or service multiplied by the quantity sold).

If the price of golf clubs increases by 10% and the cross-price elasticity between golf clubs and golf balls is -3, then the demand for golf balls will _______ by _______%.

decrease; 30 Cross-price elasticity is the percent change in the demand for golf balls divided by the percent change in the price of golf clubs. If the cross-price elasticity is -3, the demand for golf balls will decrease by 30% if the price of clubs increases by 10%.

If the percentage change in the quantity is large compared to the percentage change in the price, then the supply is:

elastic.

If the income elasticity for steak is 1.2, and incomes increase by 10%, the quantity of steak demanded will ______ by ______%.

increase; 12 The income elasticity is the percent change in demand divided by the percent change in income. If the income elasticity is 1.2 and incomes change by 10 percent, the demand for steak will increase by 12%.

If Shannon's income increases and her consumption of bagels increases, other things equal, bagels are considered a(n):

normal good.

If the income elasticity is positive, the good is a(n)

normal good. If the income elasticity is positive, it means that an increase in income will cause an increase in demand.

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-inelastic demand

the case in which the income elasticity of demand for a good is positive but 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.

Substitution effect

the change in the quantity of a good demanded as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive.