Economics Chapter: Price Elasticity of Demand

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Questions and Answers

What is indicated by a high price elasticity of demand for a product?

Consumers are indifferent to price changes.

Consumers significantly change the quantity demanded when the price changes. (correct)

Consumers will always switch to other products when prices increase.

Consumers will continue buying the product regardless of price changes.

When are products considered to have a low price elasticity of demand?

When consumers decrease their quantity demanded only slightly despite price increases. (correct)

When the product is a luxury good.

When consumers have many close substitutes available.

When the quantity demanded changes significantly with a price change.

Why might consumers return to a more expensive product after switching to a cheaper alternative?

They prefer the cheaper alternative more than the expensive one.

The cheaper alternative is no longer available.

The price of the cheaper alternative has increased significantly.

The perceived value of the expensive product has increased. (correct)

What effect do close substitutes have on the price elasticity of demand for a product?

They increase consumer sensitivity to price changes. Signup and view all the answers

What describes a situation where the demand for a product is elastic?

Consumers are willing to change their purchases significantly based on price. Signup and view all the answers

At which point on a linear demand curve is the demand considered unit elastic?

At the midpoint Signup and view all the answers

When demand is elastic, what happens to total revenue when the price increases?

Total revenue decreases Signup and view all the answers

What does it indicate if a price change leaves total revenue unchanged?

Demand is unit elastic Signup and view all the answers

What is the elasticity of demand for agricultural products like oranges if it is stated to be 0.4?

Inelastic Signup and view all the answers

If price and total revenue change in the same direction, what can be inferred about demand?

Demand is inelastic Signup and view all the answers

At what point is demand considered elastic along a linear demand curve?

Above the midpoint Signup and view all the answers

If the quantity demanded decreases significantly as price increases, what can be deduced about demand?

Demand is elastic Signup and view all the answers

Which of the following describes a situation where total revenue decreases?

Price rises with elastic demand Signup and view all the answers

How is the price elasticity of demand determined?

By comparing the percentage change in quantity demanded with the percentage change in price. Signup and view all the answers

What is the percentage change in price when Starbucks raises the price of a latte from $3 to $5?

66.67 percent Signup and view all the answers

What is the formula for calculating the percentage change in price?

Percentage change in price = (New price - Initial price) / Initial price x 100 Signup and view all the answers

When the price of a latte decreases from $5 to $3, what is the percentage change in price?

-40 percent Signup and view all the answers

Why is it important to use an average price when calculating percentage changes?

To prevent miscalculations that depend on the direction of the price change. Signup and view all the answers

Which factor does NOT influence the price elasticity of demand?

Advertising effectiveness Signup and view all the answers

If the price of a latte is raised and the quantity demanded changes relatively little, what does this indicate about the demand for lattes?

Demand is inelastic. Signup and view all the answers

What is the main reason the same dollar amount price change results in different percentage changes depending on whether the price rises or falls?

The initial price is used as the basis for calculations. Signup and view all the answers

What happens to the price of oranges if there is a 1 percent decrease in the quantity harvested due to frost, given that demand remains unchanged?

The price rises by 2.5 percent. Signup and view all the answers

How does the demand for addictive substances differ between nonusers and existing users?

Nonusers’ demand is elastic while existing users’ demand is inelastic. Signup and view all the answers

What characterizes perfectly elastic supply?

A large percentage change in quantity supplied occurs with a minimal change in price. Signup and view all the answers

If the percentage change in the quantity supplied equals the percentage change in price, how is the supply characterized?

Unit elastic Signup and view all the answers

What is the effect of high taxes on cigarettes and alcohol for established users?

They modestly affect the quantities consumed. Signup and view all the answers

When supply is said to be inelastic, what is indicated about the percentage change in quantity supplied?

It is less than the percentage change in price. Signup and view all the answers

If a 10% rise in the price of books results in a 20% increase in the quantity supplied, how is the supply characterized?

Elastic Signup and view all the answers

What is the primary measure used to determine the price elasticity of supply?

Comparing the percentage change in quantity supplied with the percentage change in price. Signup and view all the answers

What characterizes perfectly inelastic demand?

The quantity demanded remains constant regardless of price changes. Signup and view all the answers

Which of the following best describes elastic demand?

A small change in price results in a large change in quantity demanded. Signup and view all the answers

What happens to demand for necessities compared to luxuries?

Demand for necessities is often inelastic due to poor substitutes. Signup and view all the answers

How does the narrowness of a good's definition affect its demand elasticity?

Narrowly defined goods generally have elastic demand. Signup and view all the answers

What influence does time have on demand elasticity after a price change?

Demand is more elastic with more time elapsed since the price change. Signup and view all the answers

When is demand considered perfectly elastic?

When any change in price leads to an infinite change in quantity demanded. Signup and view all the answers

Which product is likely to have inelastic demand?

Basic medications. Signup and view all the answers

What is the outcome of a demand curve that is perfectly elastic?

It is horizontal. Signup and view all the answers

What does a 10% rise in the price of fish indicate about the supply's elasticity?

The supply of fish is unit elastic. Signup and view all the answers

What is the outcome when the price of hotel rooms rises by 20%?

The quantity of hotel rooms supplied increases by 10%. Signup and view all the answers

How does time influence the elasticity of supply after a price change?

Supply becomes easier to adjust in the long run. Signup and view all the answers

What characterizes the price elasticity of beachfront lots?

The supply is inelastic. Signup and view all the answers

Which factor significantly influences the elasticity of supply for storable goods?

The cost of storage. Signup and view all the answers

If the price elasticity of supply equals 0.5, what type of elasticity is it?

Inelastic. Signup and view all the answers

When calculating price elasticity of supply, what does a result of 120% ÷ 66.67% yield?

1.8, indicating elastic supply. Signup and view all the answers

What happens to goods that can be produced at a constant opportunity cost?

They have an elastic supply. Signup and view all the answers

Study Notes

Essential Foundations of Economics

This is the ninth edition of the textbook.
Authors are Bade and Parkin.

Price Elasticity of Demand

Price elasticity of demand measures how quantity demanded changes when price changes.
To calculate, compare percentage change in quantity demanded with percentage change in price.
The midpoint method averages the initial and new prices to calculate percentage change, eliminating directional bias.
A rise in price leads to a decrease in quantity demanded, and vice-versa.
Demand is elastic if quantity demanded changes more than the price.
Demand is unit elastic if quantity demanded changes exactly as much as the price.
Demand is inelastic if quantity demanded changes less than the price.
Perfectly elastic demand means quantity demanded changes drastically with a slight price change.
Perfectly inelastic demand means quantity demanded remains constant despite price changes.
Availability of substitutes, income spent, and time elapsed influence demand elasticity.
Luxury goods have elastic demand, while necessities have inelastic demand. Narrowly defined goods have elastic demand, broadly defined goods have inelastic demand.

Calculating Elasticity

Price elasticity of demand = Percentage change in quantity demanded ÷ Percentage change in price (Formula)

Total Revenue

Total revenue is the product of price times quantity.
Elasticity affects total revenue:
- Elastic demand: Price increase leads to total revenue decrease.
- Inelastic demand: Price increase leads to total revenue increase.
- Unit elastic demand: Price change has no impact on total revenue.
Total revenue tests observe revenue changes corresponding to price changes.

Applications

Orange prices and total revenue: When supply decreases (due to a frost) and demand remains the same, price elasticity is 0.4; inelastic demand causes farmer's total revenue to increase.
Addiction and elasticity: Demand for addictive substances has different types of elasticities.
- Non-users have elastic demand (a price in crease leads to reduced use).
- Existing users demand is inelastic ( a price increase has a modest effect in lowering use)
High taxes on cigarettes and alcohol reduce young adult use; established users' consumption is less impacted.

Price Elasticity of Supply

Measures the extent to which quantity supplied changes when price changes.
Perfectly elastic supply: A small price change leads to a huge change in quantity supplied.
Elastic supply: Quantity supplied changes more than the price.
Unit elastic supply: Quantity supplied changes proportionally to the price.
Inelastic supply: Quantity supplied changes less than the price.
Perfectly inelastic supply: Quantity supplied doesn't change at all despite price.

Calculating Supply Elasticity

Price elasticity of supply = Percentage change in quantity supplied ÷ Percentage change in price (Formula)

Influences on Supply Elasticity

Production possibilities
Storage possibilities
Time
Production possibilities: goods made at a constant opportunity cost have elastic supply, while those with a fixed quantity supplied have inelastic supplies
Storage possibilities: Goods that can be stored easily have elastic supply.

Cross Elasticity of Demand

Measures how demand for one good changes when the price of a related good changes.
Substitute goods: Positive cross elasticity (price of one good goes up => less demand for substitute)
Complementary goods: Negative cross elasticity (price of one good goes up => less demand for complementary good)

Income Elasticity of Demand

Measures how demand for a good changes when income changes.
Normal goods: Positive income elasticity (income goes up => more demand)
Inferior goods: Negative income elasticity (income goes up => less demand)

EYE on Elasticity at the Coffee Shop

People's responses to a price increase of a good like a latte depend on:
Availability of good substitutes
Extent to which good is a necessity
Elasticity depends on the level of substitutes available.
For goods with many substitutes, it's likely that price elasticity of demand is elastic.

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Description

Explore the essential concepts of price elasticity of demand from the textbook 'Essential Foundations of Economics'. Understand how quantity demanded reacts to price changes and learn about the different types of elasticity, including perfectly elastic and perfectly inelastic demand. Enhance your knowledge with practical calculations using the midpoint method.