Chap. 4 - Elasticity Flashcards

1
Q

What is the profit equation? What is the equation for Total Revenue?

A
Profit = Total Rev. - Total Cost
TR = Price * Quantity
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2
Q

What is price/demand elasticity?

A

It measures how sensitive people are to price changes; the percentage change in quantity demanded divided by the percentage change in the price of the good.

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3
Q

What is the difference between using arc/midpoint elasticity formula, and point elasticity?

A

Arc elasticity is used when computing elasticity over a range, from A to B, and using the average quantity and average price. Point elasticity is used for relatively small changes in price and quantity, calculus is used in this application.

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4
Q

When consumers are relatively responsive to a price change, we say that demand is _____. When the change in quantity demanded by consumers is relatively small in response to a price change, we say that demand is ______.

A

Elastic, Inelastic

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5
Q

When looking at the demand of goods or services, what are the factors that determine how much the quantity demanded changes as the price changes?

A

If the percentage change in quantity demanded is greater than the percentage change in price, the elasticity is greater than one and the good is classified as elastic, meaning the percentage change in quantity demanded is relatively responsive to the percentage change in price. An elasticity of demand less than one is classified as inelastic, meaning the percentage change in quantity demanded is relatively unresponsive to the percentage change in price.

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6
Q

Elasticity that is greater than one is ____.
Elasticity that is less than one is _____.
Elasticity that is equal to one is _____.

A

Elastic, Inelastic, Unitary Elastic

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7
Q

If operating in the Elastic portion of the demand curve and there is a price increase (decrease), Total Revenue will…?

A

Total Revenue will fall (rise). The percentage change in price is much smaller than the percentage change in quantity.

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8
Q

What is the arc or midpoint formula for elasticity?

A

((Q2-Q1)/(Q2+Q1)/2)/((P2-P1)/(P2+P1)/2)

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9
Q

If the percentage change in quantity is equal to the percentage change in price, demand is said to be ______? And in this case a price increase or decrease _____ ___ change Total Revenue.

A

Unit Elastic, Does Not

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10
Q

If operating in the Inelastic portion of the demand curve and there is a price increase (decrease), Total Revenue will…?

A

Total Revenue will rise (fall). The percentage change in price is much larger than the percentage change in quantity.

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11
Q

price changes then the elasticity of demand is zero and the demand curve is vertical. When an individual is insulin dependent and consumes the same amount of insulin each day regardless of the price, her demand would be?

A

Perfectly Inelastic. This is a vertical demand curve.

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12
Q

An individual grain farmer in a competitive market that can sell all that he can produce at the going market price. But if he tries to raise the price, the quantity demanded for the good goes to zero, his demand would be?

A

Perfectly Elastic. This is a horizontal demand curve.

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13
Q

You determine that the product you are producing and selling has an elasticity of -7. If you were to decrease the price by one percent what happens with quantity demanded?

A

A one percent decrease in the price of the good would cause a 7% increase in the quantity demanded. Remember it is elastic, and a small percentage change in price results in a much larger percentage change in quantity demanded.

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14
Q

You determine that the product you are producing and selling has an elasticity of -.161. If you were to increase the price by one percent what happens with quantity demanded?

A

A one percent increase in the price of the good would cause a .161% increase in the quantity demanded. Remember it is inelastic, and a small percentage change in price results in an even smaller percentage change in quantity demanded.

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15
Q

What are the determinants of elasticity?

A

Close substitutes, Percent of Income, Luxury or Necessity, Time, and Market Definition

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16
Q

The greater the number of close substitutes that are available for a good, the more inelastic or elastic it becomes?

A

Elastic. If there are many bread stores in the city and one bread store raises its price, the quantity demanded decreases since there are many other stores producing a similar product. On the other hand if an individual is on insulin or another particular type of medication for which few close substitutes exist, then an increase in the price results in very little change in the quantity demanded of the good.

17
Q

In general, the greater percent of income spent on the good the more inelastic or elastic it becomes, all else held constant?

A

More Elastic. If the price of toothpicks increases by 20% quantity demanded would likely decrease very little since toothpicks are only $0.50. But if a car were to increase in price by 20% it is likely quantity demanded would drop significantly.

18
Q

Those items that are a necessities in life are more inelastic or elastic than items that are a luxury?

A

Inelastic. Necessities could be food or clothing

19
Q

The longer the time period, the more inelastic or elastic a good becomes?

A

Elastic. More substitutes become available.

20
Q

Movie theaters have an elasticity of .9, if they were to decrease the price by 10% to entice more customers to come and fill empty seats what would happen?

A

A 10% decrease in price would only increase quantity demanded by 9%, thus the price drop would lead to a decrease in total revenue.

21
Q

The elasticity of supply is the same basic formula as the demand elasticity, but looks at the percentage change in quantity supplied instead of what?

A

Quantity demanded. The measure looks at the responsiveness of producer to changes in the price of the good produced. The elasticity of supply is compared to one and has a similar interpretation to that of the elasticity of demand.

22
Q

What are the main determinants of supply elasticity?

A

Product Type, Time, Production Capacity, and Input Substitution - Flexibility and Mobility

23
Q

What does cross price elasticity measure? Is it compared to one or zero?

A

The percentage change in the quantity demanded for one good, say good x, given the percentage change in the price of another good, say good y. The elasticity is compared to zero.

24
Q

For cross price elasticity, if the elasticity is greater than zero then the goods are ______, if it is less than zero the goods are ______, and if it is equal to zero then the goods are ____?

A

Substitutes, Complements, Unrelated Goods

25
Q
  1. Compute the cross price elasticity and determine if the goods are substitutes or complements. Try not to look at the answers until after you have tried to figure it out on your own first.
    Qx1 = 10 Qx2 = 11
    Py1 = $1 Py2 = $1.05
A
The goods are substitutes.
Qx1 =  10  Qx2 = 11   ΔQ = 1 
Py1 = $1 Py2 = $1.05   ΔP = .05 
Exy = (1/10.5) / (.05/1.025)
Exy = .09523/ .04878
Exy = 1.95
26
Q

If the cross-price elasticity of x and y is +0.5, then a 10 percent increase in the price of y will change the quantity demanded of x by ____.

A

The goods are complements.
Exy = -.5 = %ΔQx / 10
Solve the equation by multiplying both sides by 10.
%ΔQx = -.5* 10 = -5 or -5 percent

27
Q

What does Income Elasticity measure?

A

The percentage change in quantity demanded given a percentage change in income.

28
Q

If a good has a negative Income Elasticity then it is a _______ good, and if it has a positive Income Elasticity then it is a ______ good.

A

Inferior, Normal.

inferior goods include items such as dry milk and second-hand clothing. As incomes rise people buy less of these goods.

29
Q

Normal goods can be divided into two categories what are they, and what are their elasticity’s?

A

Necessities and they have an elasticity between 0 and 1. Luxury goods have an elasticity greater than 1

30
Q

Talise’s income increases from $25,000 to $30,000 per year and her demand for pizza increases from 12 to 14 per year. Compute her income elasticity. Try not to look at the answer until after you’ve tried to solve the problem on your own.

A

Pizza is a normal necessity for Talise.

(14-12) / (14+12)/ 2 / (30,000 – 25,000) / (30,000 + 25,000)/ 2 = .846

31
Q

Tax Burden on Consumer = Es/(Ed+Es)
Tax Burden on Supplier = Ed/(Ed+Es)
1. Compute the tax burden on the consumer and the supplier given the following:
–Ed = 1 and Es = 2

A

Tax Burden on Consumer = 2/(1+2) = 2/3

Tax Burden on Supplier =1/(1+2) = 1/3