Review 3 Elasticity Flashcards
Price elasticity of demand
the percentage change in the quantity of a product demanded divided by the percentage change in the price that caused the change in quantity. The price elasticity of demand indicates how responsive consumers are to changes in a product’s price.
When the price of widgets was $10, buyers bought 550 widgets. When the price increased to $14, widget sales dropped to 450 widgets. Calculate the price elasticity of demand in this situation.
[(Q0-Q1)(P0+p1)]/[(Q0+Q1)(P0-P1)]
[(550-450)(10+14)]/[(550+450)(10-14)]
0.6
Meaning of “demand is elastic”
change in price changes the quantity demanded
Meaning of “demand is inelastic”
changes in price does not change quantity demanded
Meaning of “demand is perfectly inelastic”
despite an increase in a product’s price, consumers still purchase the same amount of it
Meaning of “demand is unit elastic”
the percentage change in quantity demanded of a product is equal to the percentage change in its price. A curve with a decreasing slope results. Sales revenue (price x quantity sold) is constant.
The slope of a demand curve that is more elastic with have a _________________ slope.
smaller/flatter/less steep
Price elasticity of supply
the percentage change in the quantity of a product supplied divided by the percentage change in the price that caused the change in quantity supplied. The price elasticity of supply indicates how responsive sellers are to changes in a product’s price.
When the price of widgets was $11, sellers were willing to sell 500 widgets. When the price increased to $13, widget sellers were willing to sell 700 widgets. Calculate the price elasticity of supply in this situation.
[(500-700)(11+13)]/[(500+700)(11-13)]=
2
What factors determine a product’s price elasticity of demand?
availability of good substitutes (competition)
share of the typical consumer’s total budget expended on a product
if the product is considered a luxury or a necessity
time buyers have to adjust to the price change
Assume that Exxon increased the price of its gasoline 10% and that consequently its gasoline sales dropped 5%. Calculate the price elasticity of demand in this situation.
5/10=0.5
If the price elasticity of demand is less than 1, the demand is
inelastic
If the price elasticity of demand is greater than 1, the demand is
elastic
If the price elasticity of demand is 1, the demand is
unitary
If the price elasticity of demand is less than 1, increasing the price of the product will ___________ the total revenue of the company.
increase
If the price elasticity of demand is greater than 1, increasing the price of the product will ___________ the total revenue of the company.
decrease
If the price elasticity of demand is 1, increasing the price of the product will ___________ the total revenue of the company.
not affect
Assume that Amaco increased the price of its gasoline from $1.00 to $1.20, and therefore the amount of Amaco’s gasoline sales decreased from 1000 gallons to 700 gallons. Calculate the price elasticity of demand for Amaco’s gasoline in this situation.
[(1000-700)(1+1.2)]/[(1000+700)(1-1.2)]=
33/17
If the price elasticity of demand is less than 1, decreasing the price of the product will ___________ the total revenue of the company.
decrease
If the price elasticity of demand is greater than 1, decreasing the price of the product will ___________ the total revenue of the company.
increase
Is the demand for a good more elastic if the good is a small part of the buyer’s budget or if it is a large part of the buyer’s budget?
large part
Is the demand for a good more elastic if buyers have a short period of time to adjust to price changes or if buyers have a longer period of time to adjust to price changes?
longer time
Is the demand for WalMart’s products more elastic if WalMart has a lot of competition or if WalMart has less competition?
more competition
If the demand for a product is elastic, will an increase in supply have a relatively large or small effect on the price of the product?
small effect
If the demand for a product is elastic, will an increase in supply have a relatively large or small effect on the quantity of sales?
large effect
If the demand for a product is inelastic, will an increase in supply have a relatively large or small effect on the price of the product?
large effect
If the demand for a product is elastic, will an increase in supply have a relatively large or small effect on the quantity of sales?
large effect
Short run (in production)
A time period so short that a firm is unable to vary some of its factors of production. The firm’s plant size typically cannot be altered in the short run.
Long run (in production)
A time period long enough to allow the firm to vary all of its factors of production.
Does the supply of a good tend to be more elastic in the short run or long run?
long run
If the supply for a product is elastic, will an increase in demand have a relatively large or small effect on the price of the product?
small effect
If the supply for a product is elastic, will an increase in demand have a relatively large or small effect on the quantity of sales?
large effect
If the supply for a product is inelastic, will an increase in demand have a relatively large or small effect on the price of the product?
large effect
If the supply for a product is inelastic, will an increase in demand have a relatively large or small effect on the quantity of sales?
small effect
