Elasticity

Question 1

What are the main determinants of supply elasticity and what do they mean?

Answer 1

Availability of inputs – how easy is it to access the things factors of production needed to make the product

Passage of time – do firms have the necessary amount of time to make the changes needed for price changes.

Question 2

What do the different elasticity outcomes mean in terms of supply?

Answer 2

Elastic – Companies are capable of expanding or compacting production easily with changes in price

Inelastic – companies have difficulties changing their production level with the changes in price

Perfectly elastic – no matter what the price is, the company will produce as much as possible

Perfectly inelastic – no matter the change in the price, there is no way for producers to change the quantity supplied

Question 3

What is the formula for the price elasticity of supply?

Answer 3

% change in QS/% change in P = E^s-sub-p

Question 4

What is the notation for the price elasticity of supply?

Answer 4

E^s-sub-p

Question 5

What does price elasticity of supply look at?

Answer 5

Price elasticity of supply looks at a firms willingness/capability to adjust production rates to changes in price

Question 6

How do we use the cross-price elasticity to determine the relationship between items?

Answer 6

E^p-sub-c > 0 = substitutes (QD of item 1 increases and P of item 2 increases)

E^p-sub-c <0 = complements (QD of item 1 decreases and P of item 2 increases)

E^p-sub-c = 0 (or within 1/10) = unrelated items

Question 7

What is the formula for the Cross-Price Elasticity?

Answer 7

E^p-sub-c = % change QD (item 1)/ % change Price (item 2)

Question 8

What is the notation for the Cross-Price Elasticity?

Answer 8

E^p-sub-c

Question 9

What is Cross-Price Elasticity?

Answer 9

Cross-Price Elasticity is where you see how the consumption of one item will change due to a price change of another item

Question 10

How do we use our results from the income elasticity formula to determine what type of item we have?

Answer 10

0<E-sub-i<1 = a normal good that is a necessity (inelastic)

E-sub-i > 1 = a normal good that is a luxury (elastic)

E-sub-i <0 = an inferior good (only inelastic if you can’t afford anything else)

Question 11

What is the formula for income elasticity?

Answer 11

E-sub-i = % change in QD/% change in income

Question 12

What is the notation for income elasticity?

Answer 12

E-sub-i

Question 13

What is income elasticity?

Answer 13

Income elasticity is the same concept as own price elasticity. However, instead of looking at how consumers react to price changes, it looks at how consumers react to income changes

Question 14

What are the two effects that could happen when using revenue to determine if a company should change the price of a product?

Answer 14

Quantity effect – lost sales due to elastic demand = lost revenue

Price effect – inelastic demand where consumers will purchase an item despite how expensive it is = more revenue per sale = more revenue

Question 15

How can we use revenue to determine the elasticity of a product?

Answer 15

Before changing the price of a product, a company can look at what that price change would do to their revenue to determine if it is worth it or not

Question 16

How do we determine revenue (formula)?

Answer 16

Total Revenue = Price * Quantity

Question 17

What is revenue?

Answer 17

Revenue is the money a business brings in before taxes, employee payment and any supply restock

Question 18

In reference the definition of the good determinant, what terms are we using, how are they used to influence elasticity, and what is an example for them?

Answer 18

Narrow – the item you are looking for is specific enough to provide substitutes, which means an item is elastic. An example would be going to the store for frosted flakes and realizing it is really expensive. So, you buy one of the many off-brand options at your disposal.

Broad – the item you are looking for isn’t that specific, so it is difficult to find an adequate substitute for it, making the item inelastic. An example would be going to the store for cereal and finding out that it is all very expensive. Since there are no good alternatives for cereal, you buy it anyways

Question 19

What are the primary determinants of own price elasticity, what do they mean, and which of these is the most influential?

Answer 19

Availability of Substitutes – most influential, does an item have substitutes and can you easily use them to substitute said item

Passage of Time – do you have enough time to find a substitute for an item

Definition of the good – the more specific an item is, the easier it is to substitute

Luxuries vs Necessities – Luxuries are far easier to substitute because you can live without them

Share of good in our budget – the more we have to spend for a certain item, the more we are affected by the price change (increases in mortgage rates vs egg prices)

Question 20

What are the two special cases of own price elasticity and how do we use the own price elastic formula to recognize these?

Answer 20

Perfectly inelastic = |E^o-sub-p|=0

Perfectly elastic= |E^o-sub-p|=infinity

Question 21

Based on the own price elasticity, how do we know what type of elasticity we have?

Answer 21

Elastic demand = |E^o-sub-p|>1

Inelastic demand = |E^o-sub-p|<1

Unit elastic demand = |E^o-sub-p|=1

Question 22

For demand, what are the three types of elasticity outcomes we can receive and what do they mean?

Answer 22

Elastic demand – demand fluctuates a lot because it can easily be substituted (usually)

Inelastic demand – demand doesn’t change easily because it cannot be easily substituted

Unit elastic demand – nothing changes much from the equilibrium other than (maybe) the equilibrium location of the model

Question 23

Will the own price elasticity value change along the demand curve?

Answer 23

In some scenarios it can if the demand line is curve, so the distance between points can be drastically different. If the demand line is straight, however, the own price elasticity value will be the same along the entirety of the line.

Question 24

What formula do we use if we do not have the change percentage for own price elasticity?

Answer 24

|E^o-sub-p|= ((Q2-Q1)/((Q1+Q2)/2))/((P2-P1)/((P1+P2)/2))

Question 25

If we do not have a change percentage or it is difficult to gather that percentage, what can we use instead to find the own price elasticity?

Answer 25

If we do not have the change percentage all we need is the original price and quantity and the new price and quantity (after the price is changed)

Question 26

What is the greek symbol for “change”?

Answer 26

Delta - Triangle (capital) or d with a curly top (lowercase)

Question 27

Why do we use the absolute value for the own price elasticity?

Answer 27

We use the absolute value because the demand curve is sloped downward, so we will always get a negative answer otherwise

Question 28

What is the formula for own price elasticity?

Answer 28

(%change in QD)/(%change in price)=|E^o-sub-p|

Question 29

What is the notation for own price elasticity?

Answer 29

E^o-sub-p

Question 30

What is Own Price Elasticity?

Answer 30

Own Price Elasticity tells us how consumers responds to a change in price

Question 31

What are the three main types of demand elasticity?

Answer 31

Own Price Elasticity, Income Elasticity, Cross-Price Elasticity

Question 32

What is elasticity?

Answer 32

Elasticity is the level of how easy the demand or supply of an item will change based on a change in price