Economics Chapter on Elasticity of Demand

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Questions and Answers

What is elasticity of demand?

Measures how responsive the quantity demanded is to a change in price; more responsive equals more elastic

What is the elasticity rule?

If two linear demand (or supply) curves run through a common point, then the curve that is flatter is more elastic

What are the five determinants of more elastic demand?

More substitutes; long-run (more time to substitute); specific brands; luxuries; large part of budget

What are the five determinants of less elastic demand?

Fewer substitutes; short-run (less time to substitute); categories of a product; necessities; small part of budget Signup and view all the answers

Why is the demand curve for oil rather inelastic?

There are few widely available good substitutes for oil Signup and view all the answers

The demand curve for Froot Loops breakfast cereal is very elastic because:

There are many good substitutes for Froot Loops. Signup and view all the answers

When comparing two linear demand curves at a common point, the flatter curve is:

More elastic Signup and view all the answers

What type of number will the elasticity be for demand?

Negative Signup and view all the answers

What is one of the formulas to calculate elasticity of demand?

|E| = percentage change in quantity demanded / percentage change in price Signup and view all the answers

If Major League Baseball ticket prices rise by 15 percent, the number of tickets sold falls by 5 percent. The elasticity of demand is:

-5/15 = -1/3 Signup and view all the answers

What is the midpoint formula to calculate the elasticity of demand?

|E| = (Q after - Q before) / ((Q after + Q before) / 2) / (P after - P before) / ((P after + P before) / 2) Signup and view all the answers

What is the absolute value of elasticity of demand when the price of cigars is $10, quantity demanded is 1,000, price increases to $12, quantity demanded declines to 800?

1.22 Signup and view all the answers

If the price of Good Y falls from $10 to $8, and the quantity demanded rises from 1,000 units to 1,200 units, what is the price elasticity of demand expressed in absolute value?

0.82 Signup and view all the answers

If the elasticity is less than 1, what does this mean?

It is inelastic Signup and view all the answers

If the elasticity is more than 1, what does this mean?

It is elastic Signup and view all the answers

If the elasticity is 1, what does this mean?

It is unit elastic Signup and view all the answers

Which of the following probably has the least elastic demand?

Prescription medications Signup and view all the answers

What is the total revenue formula?

Price times quantity Signup and view all the answers

What is the relationship between inelastic and total revenue?

Price and revenue move together, which means if price increases/decreases, total revenue increases/decreases Signup and view all the answers

Extensive flooding in the Midwest decreases the world supply of corn. If corn is inelastically demanded, what will happen to total revenues from corn production?

They will rise Signup and view all the answers

If price increases from $10 to $20 and quantity decreases from 100 to 90, what is the total revenue?

$2090 = 1,800; $10100 = 1,000; 1,800 - 1,000 = 800; so total revenue increases by $800, meaning the demand curve must be inelastic Signup and view all the answers

What is the relationship between elastic and total revenue?

Price and revenue move in opposite directions, which means if price increases/decreases, total revenue decreases/increases Signup and view all the answers

What is the relationship between unit elastic and total revenue?

When price changes, revenue stays the same Signup and view all the answers

When demand is , an increase in price total revenue.

inelastic; raises Signup and view all the answers

In the inelastic portion of a linear demand curve, firm revenue ______ when price falls.

Decreases Signup and view all the answers

What is elasticity of supply?

Measures how responsive the quantity supplied is to a change in price Signup and view all the answers

What are the four determinants of more elastic supply?

Easy to increase production at constant unit cost; small share of market for inputs; local supply; long run Signup and view all the answers

What are the four determinants of less elastic supply?

Difficult to increase production at constant unit cost; large share of market for inputs; global supply; short run Signup and view all the answers

What is a perfectly inelastic supply curve?

A vertical line indicating that even a very large increase in price won't increase the quantity supplied Signup and view all the answers

What type of number will elasticity be for supply?

Positive Signup and view all the answers

Which of the following most likely has a perfectly inelastic supply curve?

Prehistoric cave paintings Signup and view all the answers

The supply of a good tends to be more elastic if:

Production can be expanded without causing a big increase in the price of its inputs. Signup and view all the answers

What is an application of supply elasticity?

Gun buyback programs: several cities in the U.S. have spent millions of dollars buying back guns; the objective is to reduce the number of guns in order to lower crime rates... Signup and view all the answers

Gun buyback programs will be less effective if the:

Supply of guns is more elastic Signup and view all the answers

What if all cities have a gun buyback program, what would happen to the supply curve?

The supply would not be perfectly elastic Signup and view all the answers

In 2005, Ireland began taxing residents on how much garbage they threw away to promote recycling. This story suggests that the elasticity of demand for trash collection was more than lawmakers believed because than previously thought.

Elastic; there were more substitutes for trash collection Signup and view all the answers

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? Demand for tangerines vs. demand for fruit.

The demand for tangerines is more likely to be elastically demanded than the demand for fruit because there are more substitutes for tangerines. Signup and view all the answers

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? Demand for beef next month vs. demand for beef over the next decade.

The demand for beef over the next decade is more likely to be elastically demanded than the demand for beef next month because consumers have time to adjust. Signup and view all the answers

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? Demand for Exxon gasoline at the corner of 7th and Grand vs. demand for gasoline in the entire city.

The demand for Exxon gasoline at the corner of 7th and Grand is more likely to be elastically demanded than the demand for gasoline in the entire city because a local supply tends to be more elastic. Signup and view all the answers

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? Supply of apples over the next growing season vs. supply of apples over the next decade.

The supply of apples over the next decade will be more elastic than the supply of apples over the next growing season. Signup and view all the answers

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? Supply of construction workers in Binghamton, New York, vs. supply of construction workers in New York State.

The supply of construction workers in Binghamton, New York would be more likely elastically supplied than the supply of construction workers in New York State because it is a more specific market. Signup and view all the answers

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? Supply of gold vs. supply of computers.

The supply of computers is more likely to be elastically supplied than the supply of gold. Signup and view all the answers

Suppose that drug addicts pay for their addiction by stealing. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic? What if the demand for drugs is inelastic? Explain.

When demand is inelastic, an increase in the price results in an increase in total revenue, and when demand is elastic, an increase in the price results in a decrease in total revenue. Therefore, the crackdown on suppliers causes an increase in stealing if demand is inelastic and a decrease in stealing if demand is elastic. Signup and view all the answers

Study Notes

Elasticity of Demand

Elasticity measures responsiveness of quantity demanded to price changes; more responsive indicates greater elasticity.
If linear demand curves intersect, the flatter curve is more elastic.
Determinants of elastic demand include availability of substitutes, longer timeframes for consumer adjustment, specific brands, luxury goods, and large budget shares.
Determinants of inelastic demand are fewer substitutes, shorter adjustment periods, product categories, necessity goods, and small budget shares.
Oil demonstrates inelastic demand due to lack of alternatives.

Elasticity Coefficients

Elasticity of demand is generally expressed as a negative value.
Calculation formula: |E| = % change in quantity demanded / % change in price.
Specific examples: A 15% price increase reducing ticket sales by 5% results in an elasticity of -1/3.

Types of Elasticity

Elastic demand is indicated when elasticity is greater than 1; inelastic demand is less than 1; unit elastic is when elasticity equals 1.
Total revenue and price relationships differ:
- Inelastic demand: price and total revenue move together.
- Elastic demand: price increases, total revenue decreases.
- Unit elastic: price changes do not affect total revenue.

Applications of Demand Elasticity

Gun buyback programs illustrate how the elasticity of supply can impede desired outcomes in reducing street guns; more elastic supply leads to unchanged average prices.
Consumer decision-making processes vary with time; demand for goods may be more elastic in the long run compared to the short run.

Elasticity of Supply

Elasticity of supply indicates responsiveness of quantity supplied to price changes, usually expressed as a positive value.
Determinants of elastic supply include ease of increased production, low market share for inputs, local supply conditions, and timeframes (long run).
Inelastic supply arises from challenges in increasing production, significant market share for inputs, global conditions, and short timeframes.
Perfectly inelastic supply is illustrated by vertical supply curves that do not change despite price fluctuations.

Comparative Elasticity Analysis

Specific goods tend to have different elastic demand characteristics. For instance, tangerines exhibit more elastic demand than broader fruit categories due to higher substitutability.
The supply of apples over a decade is more elastic than over a season, as suppliers have longer to adjust to price changes.
Localized supply (e.g., construction workers in a specific city) typically reflects greater elasticity than broader categories (e.g., statewide).

Effects of Drug Pricing

In illegal drug markets, an increase in prices due to crackdowns causes different theft behaviors based on demand elasticity: inelastic demand leads to increased theft, while elastic demand could decrease it.

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Explore the concept of elasticity of demand through this quiz, which covers the responsiveness of quantity demanded to price changes. Understand the determinants of both elastic and inelastic demand, and learn how to calculate elasticity coefficients with practical examples. Test your knowledge on types of elasticity and their implications in economics.

Economics Chapter on Elasticity of Demand

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Questions and Answers

What is elasticity of demand?

What is the elasticity rule?

What are the five determinants of more elastic demand?

What are the five determinants of less elastic demand?

Why is the demand curve for oil rather inelastic?

The demand curve for Froot Loops breakfast cereal is very elastic because:

When comparing two linear demand curves at a common point, the flatter curve is:

What type of number will the elasticity be for demand?

What is one of the formulas to calculate elasticity of demand?

If Major League Baseball ticket prices rise by 15 percent, the number of tickets sold falls by 5 percent. The elasticity of demand is:

What is the midpoint formula to calculate the elasticity of demand?

What is the absolute value of elasticity of demand when the price of cigars is $10, quantity demanded is 1,000, price increases to $12, quantity demanded declines to 800?

If the price of Good Y falls from $10 to $8, and the quantity demanded rises from 1,000 units to 1,200 units, what is the price elasticity of demand expressed in absolute value?

If the elasticity is less than 1, what does this mean?

If the elasticity is more than 1, what does this mean?

If the elasticity is 1, what does this mean?

Which of the following probably has the least elastic demand?

What is the total revenue formula?

What is the relationship between inelastic and total revenue?

Extensive flooding in the Midwest decreases the world supply of corn. If corn is inelastically demanded, what will happen to total revenues from corn production?

If price increases from $10 to $20 and quantity decreases from 100 to 90, what is the total revenue?

What is the relationship between elastic and total revenue?

What is the relationship between unit elastic and total revenue?

When demand is ______, an increase in price ______ total revenue.

In the inelastic portion of a linear demand curve, firm revenue ______ when price falls.

What is elasticity of supply?

What are the four determinants of more elastic supply?

What are the four determinants of less elastic supply?

What is a perfectly inelastic supply curve?

What type of number will elasticity be for supply?

Which of the following most likely has a perfectly inelastic supply curve?

The supply of a good tends to be more elastic if:

What is an application of supply elasticity?

Gun buyback programs will be less effective if the:

What if all cities have a gun buyback program, what would happen to the supply curve?

In 2005, Ireland began taxing residents on how much garbage they threw away to promote recycling. This story suggests that the elasticity of demand for trash collection was more ______ than lawmakers believed because ______ than previously thought.

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? Demand for tangerines vs. demand for fruit.

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? Demand for beef next month vs. demand for beef over the next decade.

For each of the following pairs, which of the two goods is more likely to be elastically demanded and why? Demand for Exxon gasoline at the corner of 7th and Grand vs. demand for gasoline in the entire city.

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? Supply of apples over the next growing season vs. supply of apples over the next decade.

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? Supply of construction workers in Binghamton, New York, vs. supply of construction workers in New York State.

For each of the following pairs, which of the two goods is more likely to be elastically supplied and why? Supply of gold vs. supply of computers.

Suppose that drug addicts pay for their addiction by stealing. If a government crackdown on drug suppliers leads to a higher price of drugs, what will happen to the amount of stealing if the demand for drugs is elastic? What if the demand for drugs is inelastic? Explain.

Study Notes

Elasticity of Demand

Elasticity Coefficients

Types of Elasticity

Applications of Demand Elasticity

Elasticity of Supply

Comparative Elasticity Analysis

Effects of Drug Pricing

Studying That Suits You

Description

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When demand is , an increase in price total revenue.

In 2005, Ireland began taxing residents on how much garbage they threw away to promote recycling. This story suggests that the elasticity of demand for trash collection was more than lawmakers believed because than previously thought.