chapter 4: elasticity

Question 1

what is the price of elasticity of demand

Answer 1

how quantity demanded responds to a change in price

Question 2

inelastic demand

Answer 2

large increase in price results in small decrease in quantity demanded the elasticity constant is less than one, a decimal value (can be positive or negative)

• few substitutes make it inelastic
• low percentage of income spent on this item make it inelastic
• short time period in measurement makes it inelastic

Question 3

Ep= 0.32 interpret the elasticity coefficient

Answer 3

a 1 percent increase in price results in a .32 percent decrease in quantity demanded

Question 4

if ep=.1 a 6 percent increase in price results in?

Answer 4

a .6 percent decrease in quantity demanded

Question 5

elastic demand

Answer 5

small increase in price results in a large decrease of demand, the elasticity coefficient is greater than one

• many substitutes makes a products demand elastic
• high percentage of income spent on product makes demand elastic (cars)
• a long time period involved in measurement makes this product elastic

Question 6

ep=4 interpret the elasticity coefficient

Answer 6

1 percent increase in price results in a 4 percent decrease in demand

Question 7

what are the 3 determinants of price elasticity of demand

Answer 7

• number and closeness of substitutes
• many=elastic, few= inelastic
• percent of income spent on the product:
• high=elastic, low=inelastic
• time period involved in measurements
• long=elastic, short=inelastic

Question 8

does the slope of demand curve equal elasticity

Answer 8

NO, elasticity changes between each point, it has different values all along the curve so no, the slope does not equal elasticity

Question 9

what does the price of elasticity of demand on a straight line demand curve show us

Answer 9

-it shows us that the top portion of the curve is elastic,
* the demand curve starts at zero, where price is highest and q=zero at this point, the graph is very elastic. any decrease in price will result in a very large percent increase in quantity (because 0-1 is a 100
% price increase) when later on the graph increases from 4 to 5 its still elastic but not as elastic as before.

this shows that as the price goes down and the quantity increases the graph becomes less elastic and finally crosses in to the inelastic portion, where decreasing price does not increase the percent change in quantity traded as much

the point where the graph turns from elastic to inelastic is known as the unitary point, this is when Ep=1 the change in price equals the change in quantity demanded so the revenue would stay the same ** but its also where revenue is at its highest

Question 10

price of elasticity of demand and total revenue, what does this graph show?

Answer 10

this graph is plotting revenue vs. quantity sold- the quantity sold is based on the price from a p vs. q graph, so the price of elasticity of demand and total revenue graph shows how the revenue changes in relation to the elasticity or inelasticity of what’s sold,
-on the graph the maximum revenue is equal to the point of unitary elasticity

Question 11

price of demand and total revenue graph explained

Answer 11

as quantity increases from 0-amount, the price decreases, this is when (from the other graph) the demand is most elastic, due to the decrease in price, the quantity demanded is increasing greatly resulting in an increase in revenue

• it increases to the point of unitary elasticity, this is where the price is at a point, and the quantity traded is at a point where the max amount of profit is made
• as the price continues to decrease the the quantity traded decreases past the point of unitary elasticity the elasticity of demand is now classified as inelastic meaning as price decreases the quantity is still increasing but the revenue is now decreasing

Question 12

opel

Answer 12

p and tr go in the OPPOSITE direction when ELASTIC

Question 13

sin

Answer 13

P and TR go in the SAME direction when inelastic

Question 14

elasticity definition

Answer 14

measures responsiveness of one variable to a change in another

Question 15

elasticity of supply

Answer 15

shows how responsive quality supplies is to a change in price

Question 16

income elasticity

Answer 16

shows how responsive quantity demanded is to a change in income

Question 17

cross elasticity

Answer 17

shows how responsive quality demanded is to a change in price of another product

Question 18

price elasticity of demand coefficient value meanings

Answer 18

Ep>1 = elastic demand
Ep=1 unitary demand
Ep<1 (.235)= inelastic

Question 19

elasticity of supply and coefficient value meaning

Answer 19

Es>1 = elastic supply
Es=1 unitary elasticity
Es<1 = inelastic supply
supply will always be positive

Question 20

income elasticity ( of demand) elasticity coefficient value meaning

Answer 20

Ey>0 =normal good
Ey< inferior good
01= elastic normal good-* luxury
*never take absolute value, positive is a normal good, negative is an inferior good

Question 21

cross elasticity of demand elasticity coefficient value meaning

Answer 21

Eab>0 they are substitutes (remember demand and supply rules for substitutes)
Eab= 0 no relationship
Eab< 0 they are compliments (price decrease of one results in more purchased of another)

Question 22

excise tax on item that is inelastic

Answer 22

(remember tax shifts supply curve upward for however much the value of the tax is- the price will eventually get to a new equilibrium)
Pc= amount consumers pay now
PF= price firm pays

to determine the burden to consumer, take what they usually pay and minus what they pay now,
to determine the burden to producers take what they usually make without the tax on the original supply curve and minus what they make now

-since this is tax on an inelastic product, the consumer burden is larger than the producer burden, this is because despite the large price increase from the tax, the quantity traded does not decrease very much therefore consumers are paying majority of the tax

Question 23

excise tax on an elastic item

Answer 23

PC= amount consumer pays
Pf=amount producer pays

to determine consumer burden minus what they pay now from what they originally pay, do the same for the producer: minus what they make now minus what they used to be making (STAY ON THE ORIGINAL SUPPLY CURVE)

since this product is elastic, the consumer burden will be smaller then the producer burden. with a large price increase the quantity demanded will decrease a lot more this means that producers will pay majority of the tax.

Question 24

price elasticity of demand on a straight line curve, of the full curve shows what?

Answer 24

the top of the curve, price highest and qd is lowest is the most elastic part of the graph, as the graph gets closer to the middle it reaches the unitary point, this is where the max amount of revenue is. as it continues down the graph towards lowest price and high quantity demanded it becomes more inelastic, the change in price is not resulting in as high of a change of demand relative to each other

Question 25

total revenue vs quantity explanation

Answer 25

on the elastic side of the graph, as the price decreases this increases the total revenue (price x quantity), in the middle, same as the price vs quantity graph, it reaches the unitary point, this means that Ep of demand = 1 and is the max amount of revenue that can be achieved- this is the top part of the curve, as you the quantity traded increases, the price would be decreasing past this point (law of demand price decreases more quantity demanded) but total revenue decreases this side of the graph is inelastic, even though the price is greatly decreasing, it does not have as big of an effect on the quantity demanded

Question 26

sin

Answer 26

price and total revenue go in the same direction when the graph is inelastic

price increases, total revenue increases even thought quantity demanded decreases, it doesn’t decrease very much relative to the price increase

price decreases, the total revenue decreases , the quantity traded increases but not enough relative to the price decrease to result in total revenue increasing

Question 27

opel

Answer 27

price and total revenue go in opposite directions when graph is elastic

Price decrease which greatly increases quantity traded which increases total revenue
or price increases which greatly decreases quantity traded which decreases total revenue

Question 28

income is at 30,000 you buy 150 cans of spam

income increases to 35,000 you buy 125 cans of spam, the elasticity coefficient is -1.18 what does this tell you

Answer 28

first off you can determine that this product is an inferior product by the determinants of demand, an increase in income results in a decrease in demand.
-Ey< 0 = inferior good

Question 29

Ey =.6 what type of good is this coefficient representing

Answer 29

the elasticity coefficient is for elasticity of income and the value is greater than zero so that means its a normal good, when income increases, qd increases.

you can also tell that this good is a necessity because its inelastic the value is greater than zero and less than 1

Question 30

Ey= 3.0 what type of good is this coefficient representing

Answer 30

the elasticity coefficient is showing the elasticity of income, and the value is greater than zero so it is a normal good but it is also greater than one meaning it is elastic and if its elastic, it is LUXURY

Question 31

What elasticity coefficient would a luxury item have

Answer 31

2, greater than one

Question 32

what elasticity coefficient would a necessity have

Answer 32

.34 greater than zero, less than one

Question 33

what elasticity coefficient would an inferior good have

Answer 33

negative number, less than zero,

Question 34

what elasticity coefficient would a normal good have

Answer 34

positive, any value above zero, if its a decimal number above zero .001-.9999 its a necessity if its greater than one its a luxury

Question 35

increase price in one product results in a increase in demand of another -what elasticity coefficient will it have

Answer 35

the two products are substitutes so the Eab= greater than zero

Question 36

decrease in price results in a decrease in quantity of a different product- what elasticity coefficient will it have

Answer 36

the two products are substitutes so Eab= greater than zero

Question 37

an increase in price in one product results in a decrease in quantity demanded of another Eab=?

Answer 37

these are compliments, their Eab= less than 0

Question 38

a decrease in price of one product results in an increase in quantity demanded of another Eab=?

Answer 38

these are compliments, their Eab= less than 0

Question 39

oil and gas have a cross elasticity of demand coefficient of -.12 what does this mean

Answer 39

they are inelastic compliment products

Question 40

perfectly inelastic graph

Answer 40

consumers will pay any price for product, so qd is constant no matter what price, vertical line. consumers will pay all of the tax

Question 41

perfectly elastic graph

Answer 41

consumers will only buy at certain price, its a horizontal line at that price. producers pay all of the tax

Question 42

elasticity of supply

Answer 42

-market period, known as momentary supply curve, it is perfectly inelastic. what is occurring currently in the market, the company can’t change what they’ve supplied the same second the price changes.

short run supply-time period where at least one input is fixed, less responsive, because of the shorter period of time therefore this is an inelastic supply: price change results in small change in supply

long run supply curve: time period where all inputs are variable, longer time to change anything required in order to change supply relative to price. Its ELASTIC for example- you could build another oil rig