Unit 2 Chapter 4: Elasticity

If a 5% increase income leads to a 2.5% decrease in the quantity of oatmeal demanded, then the absolute value of the income elasticity of demand for oatmeal is

-0.5

If the price elasticity of demand for beer is 1.19, and the price of beer goes up by 1%, then the quantity of bear demanded will

Go down by 1.19%

If the price elasticity of demand is less than 1 and the price increases, then total expenditure will

Increase

important rules about how price changes affect total expenditure always move in opposite directions

Rule 1: when price elasticity of demand is greater than 1, changes in price and changes in total expenditure always move the opposite directions Rule 2: when price elasticity of demand is less than 1, changes in price and changes in total expenditure always move in the same direction

income elasticity of demand

The percentage by which a good's quantity demanded changes in response to a 1 percent change in income

perfectly elastic demand

demand is perfectly elastic with respect to price if price elasticity of demand is infinite

perfectly inelastic demand

demand is perfectly inelastic with respect to price if price elasticity of demand is zero

If the price elasticity of supply for tobacco is 5, then if the price of tobacco goes down by 1%, the quantity of tobacco supplied will

go down by 5%

If the price elasticity of supply for gas is 1.6, then if the price of gas goes up by 1%, the quantity of gas supply will

go up by 1.6%

Both the supply and the demand for oil are relatively inelastic in the short-run. Thus, we would expect oil prices to be

highly volatile

When the price of demand is less then 1, changes in price and changes in total expenditure

move in the same direction

Suppose a local politician proposes that the price of lottery tickets be cut in half in order to reduce the total amount that people spend on lottery tickets. This plan will

only be effective if the demand for lottery tickets is inelastic with respect to price

perfectly elastic supply

supply is perfectly elastic with respect to price if elasticity of supply is infinite

perfectly inelastic supply

supply is perfectly inelastic with respect to price if elasticity is zero

elastic

the demand for a good is elastic with respect to price if its price elasticity of demand is greater than 1

Inelastic

the demand for a good is inelastic with respect to price if its price elasticity of demand is less than 1

unit elastic

the demand for a good is unit elastic with respect to price if its price elasticity of demand equals 1

total expenditure (total revenue)

the dollar amount that consumers spend on a product (P x Q) is equal to the dollar amount that sellers receive

cross-price elasticity of demand

the percentage by which the quantity demanded of the first good changes in response to a 1 percent change in the price of the second

price elasticity of supply

the percentage change in quantity supplied that occurs in response to a 1 percent change in price

price elasticity of demand

the percentage change in the quantity demanded of a good or service that results from a 1 percent change in its price

The price elasticity of supply will tend to be higher when

the time horizon is longer and it's easy to find or produce substitute inputs

Given that it's costly to build new oil wells to drill for oil, the price elasticity of supply for crude oil is likely to be

very low in the short run

Given that there are only so many people who can stand at the top of the Eiffel tower at any point of time, the price elasticity of supply for tickets to the Eiffel tower is likely to be

very low