Chapter 5 - 2 Flashcards
Total revenue and the price elasticity of demand
inelastic demands
Review Tutorial
Cross-price elasticity of demand
Perfectly inelastic supply
Inelastic supply (>1)
Unit Elastic Supply (= 1)
Elastic Supply (>1)
Perfectly Elastic Supply: Elasticity Equals Infinity
Can good news for farming be bad news for farmers?
Example: A discover a new wheat hybrid that is more productive than existing varieties? (a good new for farming).
- A new discover –> increase the supply of farm products and thereby lowers prices which leads to low total revenue.
Why would the Organization of Petroleum Exporting Countries (OPEC) fail to keep the price of oil high?
OPEC actually succeeded in maintaining a high price of oil only in the short run in which the demand for oil was still inelastic.
However, when it comes to the long run, increases in oil exploration and comsumers’s the use of cars requiring less gasoline, making the demand for oil become elastic.
This means that a shift in supply only leads to a small increase in price.
Necessities versus Luxuries
Necessities tend to have inelastic demands, whereas luxuries have elastic demands. When the price of a visit to the doctor rises, people will not dramatically alter the number of times they go to the doctor, although they might go somewhat less often. By contrast, when the price of sailboats rises, the quantity of sailboats demanded falls substantially.
