Questions and Answers
What is the price elasticity of demand between points A and B?
0.14
What happens to total revenue when price increases by $25 per bike?
It rises from $2,475 to $4,500 per day.
When demand is inelastic, a decrease in price will always decrease total revenue.
True
According to the midpoint method, what is the price elasticity of demand between points A and B?
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When the price of bikes decreases from $80 to $70 with elastic demand, total revenue decreases.
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What is the income elasticity of demand for houses given an 18% increase in income and a 29% increase in quantity demanded?
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Which good is most likely classified as a luxury good in Pokerville?
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What is the income elasticity of demand for clubs given an 11% decrease in income and a 10% decrease in quantity demanded?
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Which good is classified as a luxury good in Royal City?
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What is the cross-price elasticity of demand between guppy gummies and flopsicles?
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What is the cross-price elasticity of demand between guppy gummies and cannies?
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What is the income elasticity of demand for hotel rooms at the Big Winner?
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What happens to the quantity of rooms demanded at the Big Winner when the price of an airline ticket from LAX to LAS increases by 10%?
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What is the total revenue generated by Big Winner when the price is $200 and they fill 300 rooms?
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When demand is inelastic, what happens to total revenue when the price is decreased?
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What is Ginny's elasticity of labor supply between the wages of $30 and $50 per hour?
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What is the price elasticity of Jake's labor supply between $20 and $35 per hour?
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For high levels of quantity supplied, supply becomes more elastic because firms may need to invest in additional capital to increase production.
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For high levels of quantity supplied, supply becomes less elastic because firms may need to invest in additional capital to increase production.
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The price elasticity of supply is defined as the percentage change in __________ divided by the percentage change in price.
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How does an improvement in farming technology affect the supply of soybeans?
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What is the price elasticity of demand for oranges between points X and Y according to the midpoint method?
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What kind of demand does a good without any close substitutes have?
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Which good has the least elastic demand if priced approximately the same?
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Organize the following goods by their elasticity: Merlot, Wine, Beverages.
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How does the demand for oil compare in the short run versus the long run?
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What was the price elasticity of demand for laptops during the past year?
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The value of the price elasticity of demand is equal to the slope of the demand curve.
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If the price of gasoline is high for a long time, how does demand change in the short run versus the long run?
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According to the midpoint method, what is the price elasticity of demand for apples between points X and Y?
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What is the price elasticity of demand for tomatoes between points X and Y?
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Is the demand for a good with many close substitutes generally inelastic or elastic?
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Which good has the least elastic demand if priced approximately the same: chemotherapy for cancer patients or a yacht?
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In terms of elasticity, how would you rank vegetables, food, and red bell peppers?
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What happens to demand for natural gas in the long run compared to the short run?
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What is the price elasticity of demand between points A and B according to the midpoint method?
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If the demand between points A and B is inelastic, what happens when the price increases by $25?
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The value of the price elasticity of demand is equal to the slope of the demand curve.
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What does a rightward and downward shift of the supply curve represent graphically?
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What is the price elasticity of demand for soybeans between the prices of $10 and $6 per bushel?
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Is the grower's claim about increased revenue as a result of technological advancement correct?
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What does price elasticity of demand measure?
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Before the technological advancement, total revenue in the market was $______ million.
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After the technological advancement, total revenue in the market was $______ million.
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By how much did total revenue decrease after the technological advancement?
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When demand is inelastic, a decrease in price leads to a smaller rise in quantity demanded.
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Study Notes
Price Elasticity of Demand
- Price elasticity of demand quantifies consumer responsiveness to price changes, measured as the percentage change in quantity demanded divided by the percentage change in price.
- When the elasticity value is less than 1, demand is considered inelastic; a value greater than 1 indicates elastic demand.
Midpoint Method
- The midpoint method aids in calculating elasticity by providing a consistent way to measure percentage changes in quantity and price over distinct points.
- Using this method, price elasticity values can indicate whether demand is elastic, inelastic, or unit elastic between two points.
Elasticity Examples
- Demand for oranges shows inelasticity with a price elasticity of approximately 0.2 between points X and Y, indicating minimal consumer response to a price change.
- Insulin has inelastic demand due to a lack of close substitutes; an increase in its price sees little change in consumption.
- The demand for luxury items or products with close substitutes, like Coke versus Pepsi, is generally more elastic as consumers can easily switch their purchases.
Categorization of Goods
- Luxuries (e.g., diamond necklaces) tend to have more elastic demand, while necessary medical treatments (e.g., chemotherapy, heart valves) demonstrate inelastic demand due to the lack of alternatives.
- Specific categories (e.g., boot-cut jeans vs. general clothing) have varying elasticity levels, the more specific the product, the higher the elasticity, as substitutions become more apparent.
Short-run vs. Long-run Elasticity
- Demand for oil and natural gas typically becomes more elastic in the long run as consumers find substitutes and alternatives after prolonged price increases.
- In the short run, consumers have fewer options to adjust their usage, leading to more inelastic demand.
Practical Applications
- Price increases in inelastic demand situations (like items with few substitutes) will generally result in higher total revenue, as the decrease in quantity sold does not surpass the price increase.
- In elastic demand scenarios, a price decrease can lead to a decrease in total revenue since consumers are more responsive to price changes.
Key Characteristics of Elastic Demand
- Demand is elastic when there are many substitutes available, and consumers readily shift their purchase behavior in response to price fluctuations.
- The 'steeper' a demand curve, the more inelastic it typically is, while a 'flatter' curve indicates greater elasticity.
True/False Statements
- The price elasticity of demand is not equal to the slope of the demand curve; elasticity takes into account both changes in price and changes in quantity demanded.
- Demand appears less elastic when consumers consider their needs over desires, especially in the case of essential goods.
Summary of Elasticity Determinants
- Availability of substitutes, necessity versus luxury classification, time horizon for consumer adjustment, and the market categorization of goods play crucial roles in determining price elasticity of demand.### Price Elasticity of Demand
- Price and total revenue have opposite relationships when demand is elastic: a decrease in price increases total revenue and vice versa.
- Unit elastic demand results in constant total revenue regardless of price changes, as the percentage change in quantity demanded equals the percentage change in price.
Midpoint Method
- Price elasticity of demand calculated between points A (20, 80) and B (30, 70) is approximately 3, indicating elasticity greater than 1.
- Price elasticity of demand between points A (36, 100) and B (42, 80) is approximately 0.69, indicating inelastic demand.
Effects of Price Changes
- At $80 per bike, a decrease of $10 results in quantity demanded increasing from 20 to 30 bikes, raising total revenue from $1,600 to $2,100 when demand is elastic (elasticity of 3).
- An increase of $20, when demand is inelastic (elasticity of 0.69) for bikes at $80, leads to a decrease in quantity demanded from 42 to 36 but raises total revenue from $3,360 to $3,600.
Income Elasticity of Demand
- Income elasticity computation shows:
- Houses: 1.61 (normal good)
- Clubs: -0.94 (inferior good)
- Flops: 0.78 (normal good)
- A good is classified as normal if its quantity demanded increases with income and inferior if it decreases.
Luxury Goods
- Houses are considered luxury goods due to their high positive income elasticity.
- Aces, with an elasticity of 2.73, are identified as luxury goods in Royal City, being very responsive to income changes.
Cross-Price Elasticity of Demand
- Negative cross-price elasticity indicates complements; for guppy gummies and cannies, quantity demanded moves inversely with price changes.
- Flopsicles exhibit a positive cross-price elasticity of 1, indicating they are substitutes for guppy gummies.
Demand Changes in Different Economies
- In Cardtown:
- Horses: 0.07 (normal good)
- Clubs: -0.67 (inferior good)
- Diamonds: 2.4 (normal good and luxury)
- For Big Winner hotel rooms, a 20% increase in income raises quantity demanded from 300 to 350 rooms per night, indicating normal good status.
Complementary Relationship in Hotels and Airlines
- A 10% increase in airline ticket prices causes a drop in hotel room demand from 300 to 250, signifying that these goods are complements.### Big Winner Hotel Pricing Strategy
- Big Winner considers reducing room price from $200 to $175.
- At $200, 300 rooms are filled, generating total revenue of $60,000.
- Lowering price to $175 increases occupancy to 325 rooms, reducing total revenue to $56,875.
- Revenue decrease of $3,125 indicates inelastic demand, where percentage change in price exceeds percentage change in quantity.
- In inelastic situations, total revenue moves in the same direction as price changes.
Peacock Hotel Pricing Strategy
- Peacock contemplates lowering room price from $300 to $275.
- At $300, 200 rooms are filled, yielding total revenue of $60,000.
- Reducing price to $275 boosts occupancy to 225 rooms, increasing total revenue to $61,875.
- Revenue increase of $1,875 suggests elastic demand, where percentage change in quantity exceeds the percentage change in price.
- In elastic situations, total revenue moves opposite to price changes.
Short-Run vs. Long-Run Supply for Pears
- Supply of pears is more elastic in the long run than in the short run.
- Short-run constraints limit immediate production changes in response to price changes.
- Long-run adjustments can include expanding groves and planting new varieties.
- A long-run supply curve is more responsive to price changes and passes through points X and I.
Short-Run Supply for Persimmons
- Similar principles apply to persimmons, where supply elasticity varies between short and long run.
- Short-run supply curve less responsive to price changes, passing through points N and H indicates lower elasticity.
Ginny's Labor Supply Elasticity
- Ginny's willingness to work increases from 3 hours at $30/hour to 7 hours at $50/hour.
- Using the midpoint method, her labor supply elasticity is approximately 1.6, indicating elastic supply.
- Elastic supply means responsiveness to wage changes is significant.
Jake's Labor Supply Elasticity
- Jake increases tutoring hours from 7 at $20/hour to 10 at $35/hour.
- His labor supply elasticity of approximately 0.65 indicates inelastic supply.
- Inelastic supply means minimal responsiveness to wage changes.
Price Elasticity of Supply Indicators
- Supply is elastic when elasticity is greater than 1, denoting larger percentage changes in quantity than in price.
- Supply is inelastic when elasticity is less than 1, showing smaller percentage changes in quantity relative to price.
- High levels of supply usually indicate lower elasticity as production becomes constrained.
Effects of Technological Advances on Soybean Supply
- New farming technology allows for increased production at the same resource cost.
- This leads to a rightward shift of the supply curve, increasing quantity supplied at each price point.
Revenue Impact from Technological Advancements
- Growers expect total revenue to increase with higher supply; however, the price elasticity of demand is 1.33 (elastic).
- Elastic demand suggests that price decreases will lead to decreased total revenue.
- Initial revenue before technology was $250 million; after, it falls to $210 million, indicating a $40 million decrease.
Summary of Total Revenue Changes in Soybeans
- Before technological advancement: Price at $10/bushel, quantity 25 million, revenue $250 million.
- After advancement: Price at $6/bushel, quantity 35 million, revenue $210 million.
- Decrease in revenue illustrates the impact of elasticity on consumer behavior and supply adjustments.
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Test your knowledge on price elasticity of demand with these flashcards from Economics Chapter 5. Understand the concepts of inelastic and elastic demand and how to apply the midpoint method. Perfect for studying economic principles.
