Podcast
Questions and Answers
What happened to the price of oil approximately between 1979 and 1981?
What happened to the price of oil approximately between 1979 and 1981?
In the short run, when supply and demand are inelastic, what is the expected outcome of a supply shift?
In the short run, when supply and demand are inelastic, what is the expected outcome of a supply shift?
What describes the price elasticity of university T-shirts when the price decreases from $12 to $8 and quantity sold doubles?
What describes the price elasticity of university T-shirts when the price decreases from $12 to $8 and quantity sold doubles?
In the long run, when supply and demand are elastic, how does a supply shift affect prices?
In the long run, when supply and demand are elastic, how does a supply shift affect prices?
Signup and view all the answers
Which of the following typically characterizes normal goods in terms of income elasticity of demand?
Which of the following typically characterizes normal goods in terms of income elasticity of demand?
Signup and view all the answers
What indicates that a good is considered an inferior good?
What indicates that a good is considered an inferior good?
Signup and view all the answers
Which statement best describes Engel's Law?
Which statement best describes Engel's Law?
Signup and view all the answers
What does a negative cross-price elasticity of demand imply?
What does a negative cross-price elasticity of demand imply?
Signup and view all the answers
What does the price elasticity of demand measure?
What does the price elasticity of demand measure?
Signup and view all the answers
When is demand classified as elastic?
When is demand classified as elastic?
Signup and view all the answers
What factor is likely to make demand more elastic?
What factor is likely to make demand more elastic?
Signup and view all the answers
According to Engel's Law, as income increases, consumers will typically:
According to Engel's Law, as income increases, consumers will typically:
Signup and view all the answers
What is the result of a 10 percent increase in the price of ice-cream cones causing demand to fall by 20 percent?
What is the result of a 10 percent increase in the price of ice-cream cones causing demand to fall by 20 percent?
Signup and view all the answers
Which type of goods typically have inelastic demand?
Which type of goods typically have inelastic demand?
Signup and view all the answers
What is the general concept of cross-price elasticity of demand?
What is the general concept of cross-price elasticity of demand?
Signup and view all the answers
What does a price elasticity of demand equal to zero indicate?
What does a price elasticity of demand equal to zero indicate?
Signup and view all the answers
What is the impact of a longer time horizon on the elasticity of demand for most goods?
What is the impact of a longer time horizon on the elasticity of demand for most goods?
Signup and view all the answers
What does a price elasticity of demand value greater than 1 indicate?
What does a price elasticity of demand value greater than 1 indicate?
Signup and view all the answers
If the income elasticity of demand for a good is negative, what type of good is it?
If the income elasticity of demand for a good is negative, what type of good is it?
Signup and view all the answers
According to Engel's Law, what typically happens to the percentage of income spent on food as income rises?
According to Engel's Law, what typically happens to the percentage of income spent on food as income rises?
Signup and view all the answers
How is cross-price elasticity of demand defined?
How is cross-price elasticity of demand defined?
Signup and view all the answers
What is a characteristic of perfectly inelastic demand?
What is a characteristic of perfectly inelastic demand?
Signup and view all the answers
What does a price elasticity of demand value less than 1 signify?
What does a price elasticity of demand value less than 1 signify?
Signup and view all the answers
Which of the following scenarios illustrates the concept of substitutes in terms of cross-price elasticity?
Which of the following scenarios illustrates the concept of substitutes in terms of cross-price elasticity?
Signup and view all the answers
What occurs when demand is elastic and the price increases?
What occurs when demand is elastic and the price increases?
Signup and view all the answers
In the long run, how does the elasticity of supply compare to the short run?
In the long run, how does the elasticity of supply compare to the short run?
Signup and view all the answers
What can be inferred from a positive income elasticity of demand?
What can be inferred from a positive income elasticity of demand?
Signup and view all the answers
What is the effect of a price increase on total revenue when the demand is inelastic?
What is the effect of a price increase on total revenue when the demand is inelastic?
Signup and view all the answers
How does cross-price elasticity help determine the relationship between two goods?
How does cross-price elasticity help determine the relationship between two goods?
Signup and view all the answers
If the quantity demanded of a good decreases due to an increase in consumer income, what type of good is this?
If the quantity demanded of a good decreases due to an increase in consumer income, what type of good is this?
Signup and view all the answers
Study Notes
Elasticity
- Elasticity is a measure of how much buyers and sellers respond to a change in market conditions.
- A 10 percent increase in gasoline prices reduces gasoline consumption by about 2.5 percent after a year and by about 6 percent after five years.
Price Elasticity of Demand
- Consumers usually buy more of a good when its price is lower.
- The price elasticity of demand measures how much the quantity demanded responds to a change in price.
Elastic and Inelastic Demand
- Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price.
- Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.
Determinants of Price Elasticity of Demand
- Availability of Close Substitutes: a good with close substitutes tends to have more elastic demand.
- Necessities versus Luxuries: necessities tend to have inelastic demands.
- Definition of the Market: narrowly defined markets tend to have more elastic demands.
- Time Horizon: goods tend to have more elastic demand over longer time horizons.
Computing Price Elasticity of Demand
- The price elasticity of demand = (Percentage change in quantity demanded) / (Percentage change in price).
- We follow the practice of dropping the minus sign and using all price elasticities as positive numbers (absolute value).
Demand Curves
- Demand is considered elastic when the elasticity is greater than one.
- Demand is considered inelastic when the elasticity is less than one.
- If the elasticity is exactly one, demand is said to have unit elasticity.
Case Study: Prices in the Short Run
- In the short run, when supply and demand are inelastic, a shift in supply leads to a large increase in price.
Case Study: Prices in the Long Run
- In the long run, when supply and demand are elastic, a shift in supply leads to a small increase in price.
Problem: Elasticity of University T-shirts
- Last week, 25 university T-shirts were sold at $12.
- The owner reduced the price to $8, and the quantity sold doubled to 50.
- The price elasticity of demand is the percentage change in the quantity demanded divided by the percentage change in the price.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
