Econ Exam 1- Ch. 5

The quantity of coffee sold fell sharply last month, while the price remained the same. Five people suggest various explanations: Lorenzo: Supply decreased, but demand was unit elastic. Neha: Supply decreased, but it was perfectly inelastic. Sam: Supply decreased, but demand was perfectly elastic. Teresa: Demand decreased, but supply was perfectly elastic. Andrew: Demand decreased, but supply decreased at the same time. who could be right? (check all that apply)

-Lorenzo=wrong bc unit elastic=change in quantity=change in price, but it was stated that quantity changed, price=same -neha=wrong bc for quantity to fall, demand must be at least somewhat elastic -sam, teresa, and Andrew could be correct

A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the MOST ELASTIC demand? -sports car -chemotherapy for cancer patients

-sports car=elastic demand (price is much more of a factor in purchase of a sports car bc it is a LUXURY) -chemotherapy=inelastic demand (necessity=ppl willing to pay the price)

determinants of the price elasticity of demand

-the availability of close substitutes -whether the good is a necessity or luxury -how broadly you define the market -time horizon being considered

time horizon as a factor in the price elasticity of demand -If the price of gasoline is relatively high for a long time, consumers are more likely to buy more fuel-efficient cars or switch to alternatives like public transportation -therefore, the demand for gasoline is MORE OR LESS.elastic in the short run than the long run

demand for gasoline is less elastic in the short run than the long run -you have very few options in the short run bc if your car is low on gas, you need to fill up the tank, regardless of price -in long run, you can explore taking public transportation or buying car that doesn't require gas -OVERALL, CONCEPT=OPTIONS INCREASE OVER LONG RUN=MORE ELASTIC DEMAND

inelastic demand

if consumers change their purchasing behavior very little in response to a drastic change in price

complements

increase in the price of one good leads to a decrease in the demand of the other (or vice versa)

substitutes

increase in the price of one good leads to an increase in the quantity demanded of the other good (or decrease=decrease)

In general, in order for a price decrease to cause a decrease in total revenue, demand must be:

inelastic

income elasticity of demand -calculation

measures how much consumers change the quantity demanded of a good when their income changes -calculation= % change in quantity/% change in income

price elasticity of demand

measures the responsiveness of consumers to changes in price

price elasticity of supply

measures the responsiveness of suppliers to changes in price -inelastic: suppliers change their production behavior very little in response to drastic change in price -elastic: suppliers significantly change their production behavior in response to drastic change in price

cross-price elasticity of demand -calculation

measures the sensitivity of the quantity demanded of one good to changes in the price of another good -calculation: % Change in Quantity Demanded/% Change in Price

luxury good

often viewed as a normal good that has an income elasticity greater than 1 -necessities (food) tend to have lower, positive income elasticities bc consumers purchase them regardless of price -luxuries (jewelry) tend to have large income elasticities bc consumers forgo them if their income falls below certain level

You are the curator of a museum. The museum is running short of funds, so you decide to increase revenue. When should you raise the admission price in order to increase revenue?

only when the demand is inelastic

a good without any close substitutes: inelastic or elastic?

relatively inelastic demand bc consumers cannot easily switch to a substitute good if the price of the good rises ex of this concept: Pepsi is a close substitute to coke. if the price of coke increases and the price of Pepsi remains the same, many consumers will switch to Pepsi (demand of coke=elastic) ex: no close substitutes to insulin (insulin=necessity for health reasons)= inelastic demand

how broadly you define the market as a factor of price elasticity of demand: rate the following three items as most elastic, in between, least elastic: -beverages -merlot -wine

the more broadly defined the market=more elastic the demand -beverages=least elastic -wine=in between -merlot (type of wine)= most elastic (very narrow defined)

total revenue calculation

total revenue= price x quantity sold

True or False: For high levels of quantity supplied where firms have reached near maximum capacity, supply becomes less elastic because firms may need to invest in additional capital in order to further increase production.

true

True or False: The value of the price elasticity of demand is not equal to the slope of the demand curve.

true

A price change causes the quantity demanded of a good to decrease by 18%, while the total revenue of that good decreases by 20%. -true or false: the demand curve is elastic in this region

true -inelastic: decrease in demand=decrease in revenue (increase=increase) -elastic: decrease in demand=increase in price (and vice versa)

normal good

when an increase in income equates to an increase in quantity demanded (or a decrease=decrease) -goods w positive income elasticity of demand=normal

inferior good

when an increase in income leads to a decrease in quantity demanded (or vice versa) -goods w negative income elasticity of demand=negative

when is demand elastic

when the price elasticity of demand is greater than 1 -occurs when the percentage change in quantity demanded is greater than the percentage change in price

when is demand inelastic

when the price elasticity of demand is less than 1 -occurs when the percentage change in quantity demanded is smaller than the percentage change in price

when is demand unit elastic

when the price elasticity of demand=1 -occurs when the percentage change in quantity demanded is equal to percentage change in price

Two drivers—Yakov and Ana—each drive up to a gas station. Before looking at the price, each places an order. Yakov says, "I'd like 10 gallons of gas." Ana says, "I'd like $10 worth of gas." which of the following statements is correct? check all that apply -ana's price elasticity of demand is greater than 1 -yakov's price elasticity of demand is 1 -yakov's price elasticity of demand is bw 0 and 1 -yakov's price elasticity of demand is 0

yakov's price elasticity of demand is 0 -his elasticity of demand=0 (perfectly inelastic) bc he wants the same quantity regardless of the price

elastic demand

consumers change their purchasing behavior a lot in response to a drastic change in price