Microeconomics Unit 2 (Hirascau)
Price elasticity of supply
% change in quantity supplied / % change in price
Cross-price elasticity of demand Question: Scenario: If raising the price of raspberries 8% leads to an increase in demand for blueberries by 12%, then the cross-price elasticity of demand for blueberries (with respect to the price of raspberries) Solve:
%ΔQ Blueberries / %ΔP Rasberries = 12%/8% = 1.5
What is a Market:
A setting that brings together potential buyers and sellers
3. Decrease in Demand and Increase in Supply What happens to price and quantity when supply shift is big, and demand shift is small?
Price goes down Quantity goes to the right
4. Decrease in Both Demand and Supply What happens to price and quantity when supply shift is big, and demand shift is small?
Price goes up Quantity goes left
What is not a shift in demand?
Price?
At the market equilibrium, supply and demand are __ __, such that there
in balance, is no shortage or surplus
Easy entry and exit make supply more elastic: Market supply will be
more elastic when it is easier for businesses to enter or exit a market.
If the market demand curve shifts, then the market
moves to a new equilibrium
Income elasticities between 0 and 1 are
necessities
Complements have a __ cross-price elasticity of demand
negative
If the market supply curve shifts, then the market moves to a
new equilibrium
Luxuries have what type of demand?
relatively elastic demand.
Elastic demand curves are __ __, while inelastic demand curves are __ __
relatively flat, relatively steep
Shifts in demand cause price and quantity to move in the
same direction
Necessities have less elastic demand idea:
Things that you can't do without are things that you will keep buying even as the price rises
Take-away from this idea:
Those who are most willing to search will be more responsive to price changes (more elastic)
Bakery Scenario: If you sell 60 brownies at a price of $2.25, how much revenue do you have? You collect $2.25 for each of the 60 brownies you sell Solve:
Total revenue = P x Q = $2.25 x 60 = $135
For inferior goods, the change in demand for good X goes
goes in the opposite direction as the change in income
For normal goods, the change in demand for good X
goes in the same direction as the change in income.
Elastic: The absolute value of the price elasticity is
greater than 1.
The __ __ __ __ can cause a different change in quantity, depending on
same change in price, the elasticity
In easily available variable inputs make supply elastic: What happens with sellers?
sellers have the flexibility to respond to price changes
Relatively steep supply curve is
Inelastic
This is what kind of demand?
Inelastic Demand
Increase in demand and increase in supply Total effect: Effect on equilibrium price: Total effect: Effect on equilibrium Quantity:
It depends (↑P + ↓P) Rises (↑Q + ↑Q)
Decrease in demand and decrease in supply Total effect: Effect on equilibrium price: Total effect: Effect on equilibrium Quantity:
It depends (↓P + ↑P) Falls (↓Q + ↓Q)
Example of elastic supply
Landscaping Example: You can easily hire more workers and buy more lawncare supplies when prices of landscaping services rise — elastic supply
This also means that they are
More likely to find an acceptable, lower-priced substitute!
Things to go back to ?
Page 8 of slides Page 9 of slides Chapter 5: Page 5 Page 7 Page 34 Page 37 Page 42 equation
Vertical supply curve is
Perfectly Inelastic
Necessities have less elastic demand example
Prescription drugs are necessity — it is not a good option to forgo buying something your doctor prescribes, and there are likely no close substitutes.
Percentage change in quantity demanded =
Price elasticity of demand ´ percentage change in price
4. Decrease in Both Demand and Supply What happens to price and quantity when demand shift is big, and supply shift is small?
Price goes down Quantity goes left
3. Decrease in Demand and Increase in Supply What happens to price and quantity when demand shift is big, and supply shift is small?
Price goes down Quantity goes to the left
1. Increase in Both Supply and Demand What happens to price and quantity when Supply shift is big, and demand shift is small?
Price goes down Quantity goes to the right
A change in price leads to a
change in quantity demanded in the opposite direction
An increase in price will only cause revenue to rise if...
% change in price is larger than % change in quantity
Underlying structure of all elasticity formulas:
% Change in quantity / % Change in some factor
Cross-price elasticity of demand formula:
% Change in quantity demanded / % Change in price of another good
Relatively steep demand curve means
Inelastic
These questions form part of the?
Organization Options
Example:
Restaurant meals
Less than 1 is
inelastic
A surplus pushes
the price down
A decrease in price will only cause revenue to rise if...
% change in price is smaller than % change in quantity
Whenever you are solving elasticity. Does the starting amount of money matter or does the percent change in quantity matter?
% change in quantity
Price elasticity of demand =
% change in quantity demanded % change in price
Income elasticity of demand =
% change in quantity demanded / % change in income
Your income rises by 10% and you buy 16% more restaurant meals, then your income elasticity of demand for restaurant meals is Solve
%ΔQ Resturant Meals / %Δ Income =16%/10% = 1.6
Scenario: If raising the price of donuts 12% leads to a rise in quantity supplied by 16%, then the price elasticity of supply for donuts is Solve: Implication:
%ΔQ/%ΔP = 16%/12% = 1.33 The price elasticity of supply is a positive number (of course!)
Scenario: The price elasticity of demand for strawberries is -0.8. If the price of strawberries were to rise by 15%, by how much will the quantity of strawberries demanded fall? Solve on paper
%∆Q = Price elasticity of demand %∆P %∆Q = -0.8 15% %∆Q = -12% The quantity of strawberries demanded will fall by 12%.
Shorthand equivalent formula:
%∆Q = Price elasticity of demand x %∆P
What is the absolute value of price elasticity when the toll rate decreases from $8 to $6? How to find change in total revenue? Toll Rate Number of Vehicles using the Toll Everyday $8 10,000 $6 12,000
(𝑄2−𝑄1)/(𝑄2+𝑄1)/2×100/(𝑃2−𝑃1)/(𝑃2+𝑃1)/2×100|||||||| AB value: 0.64 8x10,000 = 80000 6x12,000 = 72000 72000-80000 = -8000
When there is a horizontal demand curve, what three things take place?
1. % change in quantity is infinite for any % change in price 2. The quantity demanded is infinitely responsive to a change in price 3. price E of D = ∞
Cross-price elasticity of demand practice Scenario 1: The price of cereal goes up 10%, and the demand for milk falls by 6%. What is the cross-price elasticity of demand for cereal? Solve: Interpretation:
-6% demand for milk / 10% price of cereal = -0.6 The negative sign tells us that cereal and milk are complements
Cross-price elasticity of demand practice Scenario 3: The price of sweaters goes up by 15%, and the demand for iPhones remains unchanged. What is the cross-price elasticity? Solve: Interpretation:
0% demand for iphones / 15% price of sweaters = 0 Sweaters and iPhones are unrelated goods. Having a sweater doesn't make you more or less likely to have an iPhone.
At the current $4 price, suppliers have __ of unsold gas.
0.9 gallons
Demand is inelastic when price elasticity is less than __, which indicates. Demand changes __ than price changes, and quantity demanded changes __ .
1, less, less
Horizontal supply curve indicates what three things?
1. % change in quantity is infinite for any % change in price 2. The quantity supply is infinitely responsive to a change in price: 3. price E of S = ∞
When there is a relatively flat demand curve what three things take place?
1. % change in quantity is larger than % change in price 2. The quantity demanded is relatively responsive to a change in price 3. price E of D > 1
Relatively flat supply curve indicates what three things?
1. % change in quantity is larger than % change in price 2. The quantity supplied is relatively responsive to a change in price: 3. price E of S > 1
When there is a relatively steep demand curve what three things take place?
1. % change in quantity is smaller than % change in price 2. The quantity demanded is relatively unresponsive to a change in price 3. price E of D < 1
Relatively steep supply curve indicates what three things?
1. % change in quantity is smaller than % change in price 2. The quantity supplied is relatively unresponsive to a change in price: 3. price E of S < 1
When there is a vertical demand curve what three things take place?
1. % change in quantity is zero for any % change in price 2. The quantity demanded is unchanged for any change in price 3. price E of D = 0
Vertical supply curve indicates what three things?
1. % change in quantity is zero for any % change in price 2. The quantity supplied is unchanged for any change in price: 3. price E of S = 0
The falling price has two effects: what are they?
1. As the price falls, the quantity demanded rises (law of demand). 2. As the price falls, the quantity supplied falls (law of supply)
What two things happen when both curves shift
1. Demand shift is big, and supply shift is small 2. Supply shift is big, and demand shift is small
Two examples of More competing products means greater elasticity.
1. Grocery Store Example: If the price of one pasta brand doubles, you might buy a different pasta brand instead. 2. Airline Example: Demand is more elastic for shorter flights, for which driving is a reasonable substitute.
2 examples of being a demander
1. If you are shopping on Etsy and decide to buy something, then you are a demander in the hand-made crafts market. 2. If you book a room on Airbnb, then you are a demander in the online rental lodging market.
2 Examples of being a supplier?
1. If you have an Etsy shop, then you are a producer who supplies their product in the hand-made crafts market 2. If you list your apartment on Airbnb, you are a supplier in the online rental lodging market.
6 demand shifters
1. Income (normal & inferior) 2. Preferences 3. Prices of complements and substitutes 4. Expectations about the future 5. Congestion and network effects 6. The type and number of buyer
5 supply shifters?
1. Input prices 2. Productivity and technology 3. Other opportunities and the prices of related outputs 4. Expectations about the future 5. The type and number of sellers
Determinants of the price elasticity of supply (5)
1. Inventories make supply more elastic. 2. Easily available variable inputs make supply elastic. 3. Extra capacity makes supply elastic. 4. Easy entry and exit make supply more elastic. 5. Over time, supply becomes more elastic
5 Determinants of the Price Elasticity of Demand
1. More competing products mean greater elasticity. 2. Specific brands tend to have more elastic demand than categories of goods. 3. Necessities have less elastic demand. 4. Consumer search makes demand more elastic. 5. Demand gets more elastic over time.
If something is a necssity and the price changes, the quantity demanded would either? (2)
1. Not change 2. It will decrease by less than the % change in price
Two parts of Organization Options?
1. Planned Economy 2.Market Economy
Extra capacity makes supply elastic (Example of Elastic Supply)
1. Restaurant Example 1: If a restaurant has a larger kitchen than it needs, then this extra capacity provides flexibility. 2. If prices rise, then use this extra capacity to increase meal production. 3. Result: elastic supply
Extra capacity makes supply elastic (Example of Inelastic Supply)
1. Restaurant Example 2: If a restaurant is already using its kitchen at full capacity, then it will be harder to increase production. 2. Result: inelastic supply
Inventories make supply more elastic: What happens when supply is elastic for sellers? (2 things)
1. Sellers can respond rapidly to price changes. 2. Sellers have the flexibility to adjust the quantity supplied to the market as the price changes
Two types of inventories and examples for each
1. Storable Products: gasoline 2. Non-storable products: baked goods
What three questions are asked when we organize society?
1. What goods get produced? 2. Who will produce these goods and how will they do it? 3. How will you allocate these goods? In other words, who gets what?
Price elasticity of demand calculation recipe (3)
1. What was the percentage change in price (as calculated by the midpoint formula)? 2. How much did the quantity demanded change as a percent, in response (as calculated by the midpoint formula)? 3. Calculate the elasticity (using values from steps 1 and 2)
(Calculate the Price Elasticity of Demand): Bakery Scenario: The price of fudge brownies at your local bakery rose from $1.50 to $2.25. As a result, the quantity of brownies purchased drop from 72 to 60 brownies per day. Calculate the absolute value of the price elasticity of demand for brownies. Three steps in solving it:
1. What was the percentage change in price (as calculated by the midpoint formula)? 2. How much did the quantity demanded change as a percent, in response (as calculated by the midpoint formula)? 3. Calculate the elasticity.
If prices stay up, then, over time. What two things should you do?
1. expand production or capacity by building a new factory. 2. bigger response to price changes
In over time, supply becomes more elastic: If prices rise today what two things will take place?
1. most sellers rely on their stockpiled inventories to increase the quantity supplied that same day. 2. limited ability to respond to price changes
The supply and demand framework can be used to do what? (2)
1. predict market outcomes when market conditions change 2 diagnose market outcomes you see in the news or happening around you
In Inventories make supply more elastic: If your product is easily stored, then what two things take place?
1. stockpile your product if prices are low. 2. dial up supply by selling stored inventories when the prices are high
The five determinants of price elasticity of supply are
1. the ability to store inventory, 2. the availability of inputs, 3. the availability of extra capacity, 4. the ease of entry to or exit from the market 5. the length of time to adjust supply.
A completely vertical demand curve means what two things?
1. the price elasticity of demand is zero — no matter what the change in price 2. the total quantity demanded is unchanged
The price stops falling when it hits $__, the point at which
2, Qd equals Qs once again.
But, when quantity goes from 150 to 100, it's a
33% decrease
The price stops rising when it hits $__, the point at which
4, Qd equals Qs once again.
When quantity goes from 100 to 150, it's a
50% increase
Cross-price elasticity of demand practice Scenario 2: The price of cookies goes up 5% and the demand for candy rises by 7%. What is the cross-price elasticity of demand for candy? Solve: Interpretation:
7% Demand for candy / 5% price of cookies = 1.4 The positive sign tells us that cookies and candy are substitutes.
Equilibrium Price:
: The price at which the market is in equilibrium
In equilibrium: What law is there to every buyer and seller?
Buyer: Every buyer who wants to buy an item can find a seller Seller: Every seller who wants to sell an item can find a buyer
Inelastic demand:
Buyers are not very responsive to price, so the quantity demanded rises only a little.
Elastic demand:
Buyers are very responsive to price, so the quantity demanded rises by a lot
2. Increase in Demand and Decrease in Supply What happens to price and quantity when supply shift is big, and demand shift is small?
Price goes up Quantity goes to the left
Price elasticity of demand:
A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change
Price elasticity of supply:
A measure of how responsive sellers are to price changes.
Income elasticity of demand:
A measure of how responsive the demand for a good is to changes in income
Cross-price elasticity of demand:
A measure of how responsive the demand of one good is to price changes of another
Scenario 1: The proliferation of electronic book readers (the Kindle) led to a rise in the quantity of books sold while the average price of a book fell. Question: What do these changes in quantity and price tell us about how e - books changed the publishing market?
Answer: Because price and quantity moved in opposite directions, the supply curve must have increased
Scenario 2: On Valentine's Day the price of roses rises, as does the quantity sold. Question: What do these changes in quantity and price tell us about the rose market on Valentine's Day?
Answer: Because price and quantity moved in same directions, the demand curve must have increased
Good and Bad strategies regarding the Law of Demand
Bad: If cutting prices only leads to a few new sales, then it was a bad strategy Good: If cutting prices leads to a lot more sales, then it was a good strategy
Example of Specific brands tend to have more elastic demand than categories of goods and three things that complement it.
Cereal Example: There are many substitutes for Honey Nut Cheerios 1. so if the price goes up 2. buyers simply switch to a different breakfast cereal 3. Result: Demand for Honey Nut Cheerios is quite elastic
These past three cards are examples of what determinant?
Consumer search makes demand more elastic.
Relatively flat demand curve means
Elastic
Relatively flat supply curve is
Elastic
Cross Price Elasticity of Demand formula
Ex,y = (%change Qd good X) / (%change Price good Y)
The Marriage Market example
If you are dating with the intention of marriage, then you are participating in the marriage market. You are considering what this person offers in terms of personality, finance, etc., and trying to decide whether to get married (i.e., make the purchase)
Example of being a seller?
If you own a coffee shop, then you are a producer (seller) in the coffee market.
2. Increase in Demand and Decrease in Supply What happens to price and quantity when Demand shift is big, and supply shift is small?
Price goes up Quantity goes to the right
1. Increase in Both Supply and Demand What happens to price and quantity when Demand shift is big, and supply shift is small?
Price goes up Quantity goes to the right
In the mid-1980s Howard Schultz noticed most coffee sellers were following a low-price strategy, selling cheap coffee. Schultz believed many coffee drinkers would be willing to pay higher prices for better quality coffee... and Starbucks was created Where has Starbucks opened stores?
In markets where coffee drinkers are not going to be deterred by higher prices
Decrease in demand and increase in supply Total effect: Effect on equilibrium price: Total effect: Effect on equilibrium Quantity:
Falls (↓P + ↓P) It depends (↓Q + ↑Q)
Price Matching vs Price Setting
Price matching is a strategy used by retailers to match the prices of competitors' products if a customer finds it for a cheaper price elsewhere. Price Setting is the process/procedure firms are following for setting the price.
The price stops falling when it hits $2, the point at which
Qd equals Qs once again.
Increase in demand and decrease in supply Total effect: Effect on equilibrium price: Total effect: Effect on equilibrium Quantity:
Rises (↑P + ↑P) It depends (↑Q + ↓Q)
2 rules in interpreting market demand
Rule 1 If prices and quantities move in the same direction, then the demand curve has definitely shifted. • (It's possible that the supply curve may also have shifted.) Rule 2 If price and quantities move in opposite directions, then the supply curve has definitely shifted. • (It's possible that the demand curve may also have shifted.)
Example:
Shopping at Goodwill
Equilibriums, shortages, surpluses lead the price to rise and Equilibriums, shortages, surpluses lead the price to fall
Shortages, Surpluses
Scenario: A major retailer announces plans to install charging stations for electric cars in 400 parking spaces in 120 cities. (increase in demand) 3 steps when predicting market outcomes.
Step 1: Buyers of electric cars will have greater access to charging stations, so the convenience of owning an electric car will be higher. This impacts people's demand for electric cars. Step 2: Increased convenience will increase demand for electric cars, shifting the demand curve to the right. (shifter: preferences) Step 3: At the new equilibrium, we will have an increase in both prices and quantity of electric vehicles.
Scenario: Amazon announces it is developing technology to deliver orders within 30 minutes. Owners of local stores wonder how their sales will be affected (decrease in demand) 3 steps when predicting market outcomes
Step 1: People who buy from local stores will have a close substitute for buying goods quickly. This impacts the customers' demand for local goods. Step 2: Customers are now less likely to buy from local stores, shifting the demand curve to the left. (shifter: preferences) Step Step 3: At the new equilibrium, we will have a decrease in both prices and quantity of goods bought from local stores.
Scenario: Due to a drought in California, farmers face rising water costs. Almond farming is a water-intensive process. How will the drought affect the market for almonds? (decreased supply) 3 steps when predicting market outcomes
Step 1: The drought will affect the farmers' marginal cost of producing almonds. This impacts the almond supply curve. Step 2: The water shortage increases the farmers' marginal costs of production, leading to a decrease in supply. The supply curve shifts to the left. (shifter: input prices) Step 3: At the new equilibrium, we will have higher almond prices and a lower quantity of almonds sold
Scenario: The federal government announces plans to fund research that will lower the cost of batteries used in electric cars. (increased supply) 3 steps when predicting market outcomes
Step 1: The new technology will affect the seller's marginal cost of producing each electric car. This impacts the supply of electric cars. Step 2: Cheaper batteries reduce the cost of production. Lower marginal costs lead to an increase in supply, shifting the supply curve to the right. (shifter: input prices) Step 3: At the new equilibrium, we will have a decrease in prices and a higher quantity of electric cars sold
Elastic demand:
The quantity demanded is relatively responsive to a change in price, so when the price falls, the quantity demanded rises a lot in response to the price cut (i.e., extra sales make up for the price cut).
Inelastic demand:
The quantity demanded is relatively unresponsive to a change in price, so when the price rises, the quantity demanded does not fall by much
Total revenue:
The total amount you receive from buyers, which is calculated as price x quantity (P X Q IS THE FORMULA)
Exceptions Idea
There are two extreme cases for which the elasticity does not change
The sign of the income elasticity of demand indicates whether the good is
normal or inferior
wine and cheese, shoes and sandals, shampoo and conditioner, peanut butter and lumber. beef and chicken. tables and chairs Which are Independent, Substitutes, or Complements?
Substitutes: Shoes and Sandals Beef and chicken Independent: Peanut butter and lumber Complements: wine and cheese tables and chairs shampoo and conditioner
Law of Demand
Tells us that when the price falls, the quantity demanded will rise
Equilibrium:
The point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded.
Where is surplus within a market equilibrium graph?
The price that is above the v part of the x (within)
Where is shortage within a market equilibrium graph?
The price that is below the upside down v of the x (within)
Equilibrium Quantity:
The quantity demanded and supplied in equilibrium.
When there is market equilibrium what happens?
The quantity demanded equals the quantity supplied.
Example of Demand gets more elastic over time
Travel Example: You are planning a trip to Hawaii sometime for the upcoming year. You have plenty of time to watch plane ticket prices and get the best deal.
Example of inelastic supply
Vehicle Example: If microprocessors (chips) are not readily available, then car suppliers cannot easily produce more cars even when prices are high — inelastic supply.
Planned Economy: Centralized decisions are made about
What is produced, how, by whom, and who gets what
Perfectly elastic:
When any change in price leads to an infinitely large change in quantity
Perfectly inelastic:
When quantity does not respond at all to price changes
Elastic:
When suppliers can increase the quantity supplied in response to higher prices.
Inelastic:
When suppliers cannot increase the quantity supplied by much in response to higher prices.
Elastic
When the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price
Inelastic
When the absolute value of the percent change in quantity is smaller than the absolute value of the percent change in price
Is price a shifter in supply?
Yes. jk hell no
Example of necessities
You have to buy toilet paper, and if your income goes up, you aren't going to buy that much more
Result:
You will be more price sensitive (have more elastic demand)
What important insights does this entail? (select all that apply) a. with linear demand curves, elasticity will eventually will differ as you move along a curve. b. elasticity measures responsiveness in percent change, which is different than slope. c. elasticity is unitary along a linear demand curve d. elasticity is constant along a linear demand curve
a and b
Why does this total decrease occur (multiple selections) a. customers are very responsive to price changes and switching to viable alternatives to the product b. Customers are less responsive to price changes due to the lack of viable alternatives to the product c. the percent increase in price outweighs the percent decrease in quantity demanded d. The percent decrease in quantity demanded outweighs the percent increase in price
a and d
The more competing products there are, the more likely you'll be able to find
a close substitute.
Because demand increased, at the original $3 price there is now
a shortage
Because demand decreased, at the original $3 price there is now
a surplus
Because supply increased, at the original $3 price there is now
a surplus.
If a market is not in equilibrium what takes place? a. supply changes to bring demand into balance b. demand changes to bring supply into balance c. price changes to bring supply and demand into balance d. quantity changes to brings supply and demand into balance
c. price changes to bring supply and demand into balance
This surplus kick-starts the
adjustment process that pushes the price down.
The slope will be the same where?, but elasticity will change at
all along a linear demand curve, different points along the same demand curve.
What can be inferred about the elasticity of both curves once price goes below $1.50? a. demand is elastic for both curves b. demand is inelastic for both curves c. demand is elastic for the steeper curve and inelastic for the flatter curve d. there is not enough information to make a determination
b.
A decrease in demand causes a decrease in
both equilibrium price and quantity
An increase in demand causes an increase in
both equilibrium price and quantity.
complements are goods that you consume together. Thus, if one of the pair gets more expensive, then you
buy less of both
Recall, inferior goods are goods that you
buy less of when your income goes up (and more of when income goes down)
When you buy a cup of coffee, you are a __ (__) in the coffee market.
buyer, demander
The sign of the cross-price elasticity of demand indicates if the two goods are
complements or substitutes
If the price of a good falls and this causes the quantity demanded of another good to increase, then the items are considered to be complements or substitutes and the cross price elasticity is positive or negative?
complements, negative
An article in Forbes noted that the Intercounty Connector toll road that connects two counties in Maryland was not generating as much toll revenue as predicted. At that time, the toll rate was $8 for a passenger car making a round trip from end to end on the tollway during rush hour. What additional information would you need to know in order to determine if the toll should be increased or decreased? a)The price elasticity of supply b)The income elasticity of drivers using the tollway c) The number of vehicles using the tollway per day d)The price elasticity of demand and why? (2)
d)The price elasticity of demand 1. Understanding the price elasticity of demand will help guide the decision about whether to increase or decrease the toll. 2. If the price elasticity of demand is inelastic, or less than 1, an increase in the toll will increase the total revenue the toll generates.
Almonds are a crop that grows on trees. Farmers do not need to replant trees every year to produce a crop of almonds. It takes at least five years after planting for trees to bear fruit. Several factors such as weather, disease, and long term projections about price impact the supply of almonds available. Barley is a grass that must be planted each year to produce a crop. The growing season is short, about three to four months. Several factors influence farmers' decisions to plant barley each year, including price, weather, and disease.based on this information: a)barley has a more inelastic supply in the short run because barley is more dependent on price in the short run. b)it is impossible to infer anything about the price elasticity of supply for these two crops. c)the crops have the same price elasticity of supply because they are both agricultural commodities. d)almonds have a more inelastic supply in the short run because little can be done to change production in the short run.
d)almonds have a more inelastic supply in the short run because little can be done to change production in the short run.
If a company raised the price of its product by 15%, and sold 10% fewer units... a. demand for the product is currently elastic and revenue decreased. b. demand for the product is currently elastic and revenue increased. c. demand for the product is currently inelastic and revenue decreased. d. demand for the product is currently inelastic and revenue increased.
d. demand for the product is currently inelastic and revenue increased.
The EpiPen is a lifesaving device used by individuals with severe allergies. The U.S. manufacturer of the EpiPen raised its price by nearly 25% per year for nearly a decade. For each 25% increase in the price, quantity demanded would(increase/decrease)by(more than/less than/exactly)25%.
decrease, less than
Taking a more expansive view, we even see markets form in settings in which money
does not actually get exchanged.
(Travel Example): Your timetable allows you to be price sensitive — your demand is
elastic
Greater than 1 is
elastic
With which type of demand curve does total revenue decrease due to the increase in price? a) neither b) elastic demand c) inelastic demand d) both
elastic
Result:
elastic supply
Elasticity and Business Strategy: How can you (as a seller) increase your total revenue? It depends on how
elastic the demand for your product is!
Shopping Example: If clothing is expensive, you are likely to respond to a 15% discount (__), but if the clothing is already cheap, the 15% discount will elicit less of a response from you (__)
elastic, inelastic
when something is flatter it is __ when something's steep it is __
elastic, inelastic
Demand is more __ in the __ __ than in the __ __
elastic, long run, short run
There is a shortage in the market if the quantity demanded
exceeds the quantity supplied
In Extra capacity makes supply elastic: Fixed inputs (a __, a __, an __), act as a
factory, kitchen, office, constraint on a business's ability to expand production
As the price falls, the quantity supplied __, and the quantity demanded __
falls, rises
As the price falls, the quantity supplied __, and the quantity demanded __.
falls, rises
Supply elasticity is all about
flexibility
The change in demand for good X goes __ __ __ __ as the change in the __ __ __ __
in the opposite direction, price of good Y
The change in demand for good X goes
in the same direction as the change in the price of good Y
Necessities tend to have small
income elasticities
An increase in supply causes an __ and a __
increase in price, decrease in quantity.
A decrease in demand causes the demand curve to shift __
left
When the price of gas is ABOVE the equilibrium price level, __, leading to
not enough people want to buy the gas being sold, to a surplus: Qd < Qs
If the goal of a government entity is to raise funds by taxing a good or service, it is easier to raise revenue if the demand curve for the good/service is elastic, inelastic, or perfectly elastic
inelastic
If, however, you need to get across country within the next 48 hours for a family or work-related emergency, then you will buy a ticket regardless of the price. Your timetable does not allow you to be price sensitive — your demand is
inelastic
Example: Coke & Pepsi: Some people are die-hard Coca-Cola drinkers, and would never switch to Pepsi, even if the price of Coke rose dramatically (__ __ __ __)
inelastic demand for Coke
To enter as a seller in the catering market, you need a kitchen, cooking skills, and $100,000 to cover start-up costs. To enter as a seller in the airline market, you need planes, pilots, crew, etc., and a single Boeing 747 costs over $300 million! - Airline market supply is relatively __. - Catering market supply is relatively __.
inelastic, elastic
A completely horizontal demand curve means the price elasticity of demand is
infinite.
Elasticity relation to slope
is not the same thing as slope
The percentage change in quantity supplied is __ than the percentage change in price
larger
Luxuries tend to have what type of elasticities
larger income elasticities
Europe has eight different companies selling devices similar to the EpiPen. If these devices were available for use in the U.S. market, you would expect price elasticity of demand to become(more inelastic/ less inelastic). This would also lead Mylan to charge a(higher/lower)price.
less inelastic, lower price
consumers are __ __ to price changes in the overall category of breakfast cereals which lead to
less responsive, fewer alternatives to cereal overall, than there are for a specific type of cereal.
Inelastic: The absolute value of the price elasticity is
less than 1
There is a surplus in the market if the quantity demanded is
less than the quantity supplied.
Some countries formalize the marriage market by creating a __ __in which people seeking life partners can advertise and/or "shop" the available options. For example,
literal marketplace, China has marriage markets in many cities
If the demand curve for your product is relatively elastic, then you should
lower the price of your good to increase your total revenue
Income elasticities higher than 1 are
luxuries
Market Economy: Each individual
makes their own production and consumption decisions, buying and selling in markets
In a perfectly competitive market there are little/many sellers, each selling different/identical products
many, identical
To get a consistent measure of elasticity between two points, we will use the what? and formula?
midpoint formula when calculating the price elasticity of demand = %ΔQ / %ΔP
When consumers are willing to search for a low-cost alternative, demand for that product is
more elastic
This balance between the two sides of the market is why there is
no tendency for the market price to change from this equilibrium point
If someones income rises, the person will be able to retain their purchase of a service if the subject moderately increases its price. This means that the subject is a
normal good
In this case, the outcome is
not negative
For inelastic supply: The seller is
not responsive to changes in price
Impact of a price change on total revenue depends
on which change was relatively bigger: price or quantity
The impact of the two shifts on equilibrium price and quantity may be ambiguous, such that your conclusion about the new equilibrium may be, "It depends" — it depends
on which curve shifted the most
Your elasticity also depends where you are
on your demand curve.
Shifts in supply cause price and quantity to move in
opposite directions
The market demand curve summarizes __ __ __ __, but if those plans change, then the
people's current buying plans, market demand curve will shift
Cross-price elasticity of demand: measures the
percentage change in quantity demanded that follows from a 1% change in the price of another good
Elasticity =
percentage change in quantity/percentage change in price
Horizontal demand curve means
perfectly elastic
Horizontal supply curve is
perfectly elastic
Vertical demand curve means
perfectly inelastic
Elasticity will differ by what three subjects?
person, product, and price
In this case, the outcome is
positive
Substitutes have a __ cross-price elasticity of demand
positive
Substitutes have a __ income elasticity of demand
positive
whenever you are solving for absolute value change negative answers into
positive
The law of supply tells us
price and quantity supplied move in the same direction
This surplus kick-starts the adjustment process that pushes the
price down.
Flexibility is the underlying determinant of __. The more flexible you are, the __ your price elasticity of supply will be.
price elasticity of supply, greater,
The Demander's Perspective • At a price of $2 you worry the gas station will sell out of gas before you get the amount you want. • You offer to pay 10 cents above the current price in order to ensure you get all the gas you want. Consumers continue to push the __ __as long as the __ __
price up, shortage persists
In easily available variable inputs make supply elastic: If the variable inputs needed to expand production are easily available, then
quickly acquire more of these inputs and start producing more.
If the demand curve for your product is relatively inelastic, then you should
raise the price of your good to increase your total revenue
The Supplier's Perspective • At a price of $2 you totally sell out of gas. • Raising the price to $2.10 you still sell out of gas. • Raising the price to $2.50 you still sell all your gas. You can keep __ and sell all your gas (more profit for you!) as long as __
raising your price, shortage persists
Necessities have what type of demand?
relatively inelastic demand
An increase in demand causes the demand curve to shift __.
right
An increase in supply causes the supply curve to shift __.
right
The market for coffee is at the equilibrium price and a labor shortage drives up the wages of baristas who make the coffee. As a result, the price of coffee will (rise/fall) and the quantity of coffee will (rise/fall)
rise, fall
Slope =
rise/run = change in price/change in quantity
How to find the slope?
rise/run, y2-y1/x2-x1
Effect on Equilibrium Price Ex. 1 Increase in Demand __ Ex. 2 Decrease in Demand __ Ex. 3 Increase in Supply __ Ex. 4 Decrease in Supply __
rises falls falls rises
Effect on Equilibrium Quantity Ex. 1 Increase in Demand __ Ex. 2 Decrease in Demand __ Ex. 3 Increase in Supply __ Ex. 4 Decrease in Supply __
rises falls rises falls
As the price rises, the quantity supplied __, and the quantity demanded __
rises, falls
Whenever the price is BELOW the equilibrium price. The lower the price is below the equilibrium price, the larger the
shortage
At the supply-equals-demand equilibrium, there is no
shortage or surplus
if there is worry that consumers may drastically change their consumption in response to a price change, a business should or should not increase their price?
should not
For inelastic supply: The percentage change in quantity supplied is __ than the percentage change in price
smaller
The price elasticity of demand (elastic versus inelastic) tells us whether the percentage change in price is
smaller or larger than the percentage change in quantity.
Elasticity is all about
substitutability
You may have observed that items such as different brands of aspirin, tomato sauce, or gasoline are typically priced the same as each other. This is particularly true when consumers can find these goods in close proximity to each other. For example, prices are often the same at gas stations that are on opposite sides of the street. Prices are also generally the same for products next to each other on the same grocery store shelf. The aforementioned examples are goods that are likely to be (complements or substitutes). The aforementioned examples are goods that are likely to be (small, insignificant, large), because the opportunity cost of getting information on price is low.
substitutes, large
If the price of a good falls and this causes the quantity demanded of another good to fall, then the items are considered to be complements or substitutes and the cross price elasticity is positive or negative?
substitutes, positive
Actual formula for Midpoint Formula
x2-x1/(x2+x1)/2 x 100
The supply-equals-demand equilibrium occurs where the
supply and demand curves meet
The higher the price is above the equilibrium price, the larger the
surplus
At equilibrium, there is no
tendency for change.
What does the market supply curve summarize?
the current selling plans, but if those plans change, then the supply curve will shift
Midpoint formula: Divide
the difference between two points by the average of the two points
In 2017, Hurricane Irma had a significant, negative impact on the orange harvest in the state of Florida. The U.S. Department of Agriculture predicted that the quantity of oranges produced would be 21% lower than the previous year. If the price elasticity of demand for oranges is -1.5, what impact would Hurricane Irma have on the price of oranges? change in price of oranges: how would you solve?
the formula you would get is 21/x = -1.5 divide 21 and 1.5 and get your answer which is 14
Use price elasticity of demand to forecast
the likely consequences of a given price change.
Income elasticity of demand measures
the percentage change in quantity demanded that follows from a 1% change in income
Price elasticity of supply measures
the percentage change in quantity supplied that follows from a 1% price change.
A shortage pushes
the price up
Example: If the price of gas falls from $3 to $2, it will cause __ __ __ __ __. By __
the quantity demanded to rise, how much depends on whether buyers have
The percentage change depends on
the starting point
The price of gas continues to fall until
the surplus is eliminated and the market forces are in balance at the market equilibrium
When the price of gas is BELOW the equilibrium price level, there are
too many people chasing too little gas, leading to a shortage: Qd > Qs
Marginal benefit =
total benefit / change number of subject
Marginal Cost =
total cost / change number of subject
The same rise in price caused what two things?
total revenue to fall in the elastic case, and rise in the inelastic case
In over time, supply becomes more elastic: Price elasticity of supply is
typically larger (more elastic) when viewed over a longer time frame:
For elastic supply: The seller is __ __ to price.
very responsive
This is why you are more likely to encounter a Starbucks in
wealthier cities rather than poorer rural areas, and why Starbucks focuses on specialty drinks you can't find elsewhere
Substitutes are goods that can replace one another. Thus, if good Y gets more expensive, then
you simply switch to good X (i.e., the QD of good X increases).
normal goods are goods that you buy more of when
your income goes up (and less of when your income goes down).
