microecon chapter 6
Consider the demand curve illustrated in the figure to the right. Is demand elastic or inelastic?
Along most demand curves, elasticity is not constant. For example, elasticity is not constant along a linear demand curve. At prices above the midpoint of a linear demand curve, demand is elastic, and at prices below the midpoint of a linear demand curve, demand is inelastic. Therefore, demand is elastic at all prices above $8.00 and inelastic at all prices below $8.00 .
Suppose the price of salt increases by 25 percent and, as a result, the quantity of pepper demanded (holding the price of pepper constant) decreases by 1 percent. The cross-price elasticity of demand between salt and pepper is
Cross-price elasticity of demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another good: Cross-price elasticity of demandequals StartFraction Percentage change in quantity demanded of one good Over Percentage change in price of another good EndFraction . Therefore, the cross-price elasticity of demand between salt and pepper is: Cross-price elasticity of demandequals StartFraction negative 1 Over 25 EndFraction equals negative 0.04.
According to a news story, during the summer of 2015, gasoline prices were expected to decline by 32 percent, while "U.S. drivers are expected to consume slightly more gasoline, a 1.6 percent increase, during the summer." Source: Damian J. Troise, "Summer Gas Prices Expected to Be 32 Percent Lower This Year," Associated Press, April 7, 2015. Given this information, the price elasticity of demand for gasoline is
If there is a 1.6 percent increase in gasoline consumption in response to a 32 percent decline in price (holding everything else constant), the price elasticity of demand would be StartFraction Percentage change in quantity demanded Over Percentage change in price EndFraction equals StartFraction 1.6 Over negative 32 EndFraction equals negative 0.05 .
How is the price elasticity of demand measured? The price elasticity of demand is measured as
the percentage change in the quantity demanded divided by the percentage change in price.
Suppose income increases by 10 percent and, as a result, the quantity of a particular brand of automobile demanded (holding the price for this particular automobile constant) increases by 5 percent. The income elasticity of demand for this brand of car is
The income elasticity of demand A measure of the responsiveness of quantity demanded to changes in income, measured by the percentage change in quantity demanded divided by the percentage change in income: Income elasticity of demandequals StartFraction Percentage change in quantity demanded Over Percentage change in income EndFraction . Therefore, the income elasticity of demand for this brand of car is: Income elasticity of demandequals five tenths equals 0.50.
In this example salt and pepper are
The cross-price elasticity of demand is positive or negative depending on whether the two products are substitutes or complements. An increase in the price of a substitute will lead to an increase in quantity demanded, so the cross-price elasticity of demand will positive. An increase in the price of a complement will lead to a decrease in the quantity demanded, so the cross-price elasticity of demand will be negative. In this example, an increase in the price of salt increases the quantity of pepper demanded, so salt and pepper are substitutes .
At what price is total revenue maximized?
Total revenue is maximized when the demand curve is unit elastic. That is, total revenue is maximized at the price at the midpoint of a linear demand curve. Therefore, total revenue is maximized at a price of $8.00 .
In this example, salt and pepper are
complements
Suppose gasoline has few close substitutes available. If so, then an increase in the price of gasoline will likely
decrease the quantity of gasoline demanded by a relatively small amount.
MIT economist Jerry Hausman has estimated the price elasticity of demand for Post Raisin Bran cereal to be minus 2.5 and the price elasticity of demand for all types of breakfast cereals to be minus 0.9. The demand for Post Raisin Bran cereal is and the demand for all types of breakfast cereals is
elastic, inelastic
Consider firms that introduce new products, such as DVDs in 2001. When firms introduce new products, how do they typically determine the price elasticity of demand for those products? Firms with new products often
estimate price elasticity of demand by experimenting with different prices.
Why might the demand for Post Raisin Bran cereal be more elastic than the demand for all types of breakfast cereals? Post Raisin Bran cereal
has more substitutes available
In particular, the supply curve for a particular product will be increasingly more elastic over a period of time.
longer
The demand for Buick automobiles should be the demand for all automobiles .
more elastic
flatter demand curve
more elastic
Compare the demand for pepper with demand for food . The demand for pepper is likely
more inelastic because pepper tends to represent a smaller fraction of a consumer's budget.
Instead, suppose salt and pepper were complements . If so, then the cross-price elasticity of demand between salt and pepper would be
negative
This particular brand of automobile is a(n) good.
normal (pos but <1 = normal and necessity, pos and >1 = normal and luxury, negative=inferior)
If so, then the cross-price elasticity of demand between salt and pepper would be
positive
The demand is
price inelastic because the absolute value is less than one.
Compare the demand for water with the demand for wine. The demand for wine is likely
relatively more elastic because wine is a luxury
Which of the following is a primary determinant of the price elasticity of supply The price elasticity of supply is affected by
the passage of time
Suppose the price of salt increases by 25 percent and, as a result, the quantity of pepper demanded (holding the price of pepper constant) increases by 4 percent. The cross-price elasticity of demand between salt and pepper is
Cross-price elasticity of demand The percentage change in quantity demanded of one good divided by the percentage change in the price of another good: Cross-price elasticity of demandequals StartFraction Percentage change in quantity demanded of one good Over Percentage change in price of another good EndFraction . Therefore, the cross-price elasticity of demand between salt and pepper is: Cross-price elasticity of demandequals StartFraction 4 Over 25 EndFraction equals 0.16.