inquizitive 4 - elasticity

Holding the prices of goods constant, how does an increase in income affect consumer spending on necessities versus luxuries?

As income increases, spending on luxuries increases more than spending on necessities

As the prices in markets change, buyers and sellers respond in different ways according to how much time they have to react. Match the time period to its correct description.

Short-run:

- Demand is somewhat elastic. Buyers have some time to adjust to a change in the market.

Immediate-run:

- Buyers have no time to adjust to a change in the market. Demand is inelastic.

Long-run:

- Buyers have a significant amount of time to adjust to a change in the market. Demand is elastic.

Label each pair of products with the correct cross-price elasticity of demand.

Zero: Deodorant & milk

(No relationship)

Negative: Tortilla chips and salsa

(Complements)

Positive: Burger King and McDonald's

(Substitutes)

What does the price elasticity of supply measure?

The responsiveness of the quantity supplied to a change in price

The graph below depicts a series of changes in the market for oil. The initial demand curve is D1, and the initial (short-run) supply curve is SSR.

First, the demand for oil changes from D1 to D2. This leads to a price increase from $50 to $90.

Then, over time, supply becomes more elastic as represented by the supply curve changing from SSR to SLR. This leads to a price drop from $90 to $80.

What role does the elasticity of demand play in the price change from $90 to $80?

True:

- The more elastic the demand, the smaller the price drop after the initial increase.

- The more elastic the demand, the greater the long-run equilibrium quantity (Q3)

False:

- The more elastic the demand, the larger the price drop after the initial increase.

- The more elastic the demand, the smaller the long-run equilibrium quantity (Q3).

Describe how to calculate the price elasticity of demand.

The price elasticity of _____ equals the percentage change in _____ divided by the percentage change in _____. When the percentage change in the quantity demanded is larger than the percentage change in price, the demand is _____.

demand, the quantity demanded, price, elastic

What are the determinants of the price elasticity of supply?

Determinant of the Price Elasticity of Supply:

- the flexibility of producers

- time and adjustment process

Not a Determinant of the Price Elasticity of Supply:

- how much income buyers have

- how fast buyers react to a change in the price of the product or service

Use the midpoint method to calculate the price elasticity of demand for potato chips that increased in price from $2.00 to $3.00. The quantity demanded decreased from 100 bags a week to 50 bags a week at the local grocery store. Round to one decimal place.

-1.7

How does the existence of substitutes for a product affect the product's price elasticity of demand?

If there are many substitutes, the price elasticity of the good will be elastic

Which determinants influence whether the price elasticity of demand is elastic or inelastic?

Determinant that Influences Elasticity:

- the existence of substitutes

- the share of the budget spent on the good

- necessities vs. luxury goods

- time and adjustment process

Not a Determinant that Influences Elasticity:

- changes in the prices of a complementary good

- the per-unit cost firms must incur to supply a good to the market

Using the midpoint method described in the textbook, find the cross-price elasticity of demand for FedEx and UPS overnight shipping.

The price of FedEx increased from $65 to $75. The quantity demanded of UPS increased from 1.2 million packages per day to 1.3 million.

Round to two decimal places as necessary.

0.56

If an increase in the price of good E leads to a large decrease in the demand for good F, what is the relationship between the two goods?

Relationship between the Two Goods:

- The goods are complements and the cross-price elasticity of demand is negative and large

Not a Relationship between the Two Goods:

- The goods are SUBSTITUTES and the cross-price elasticity of demand is negative and large

- The goods are complements and the cross-price elasticity of demand is POSITIVE and large

- The goods are complements and the cross-price elasticity of demand is negative and SMALL

Identify the statement that correctly describes the income elasticities of necessities.

Necessities have income elasticities between 0 and 1

Use the midpoint method to calculate the price elasticity of supply for tablet computers, using the following information:

Q1 = 10 P1 = 100

Q2 = 30 P2 = 150

2.5

The textbook discusses several things that determine how price elastic the supply of a good or service is. These are known as the determinants of the price elasticity of supply. Changes in these determinants can cause the elasticity of supply to change. The figure below shows a supply curve that starts out perfectly inelastic at S1 and then becomes more elastic as it moves to S2, and then to S3.

Which of the determinants of the elasticity of supply could this graph be representing?

Determinant represented by the graph:

- time and the adjustment process

- the flexibility of producers

Not a Determinant represented by the graph:

- change in income

- the flexibility of buyers

T/F: For consumers with an income around $50,000 a year, you can expect the price elasticity of demand to be more elastic for a $20,000 ski boat than for a $1 roll of toilet paper.

True (The boat is a luxury good and buying it would take a large share of the person's income. Both of these characteristics make the demand for the good price elastic (sensitive))

Match the price elasticity of supply to the product it describes.

Perfectly inelastic:

- 1987 Volkswagen Beetles

Relatively inelastic:

- Christmas trees

Relatively elastic:

- candy bars

Match the product to its correct income elasticity.

Income elasticity < 0: dehydrated instant ramen noodles (inferior good)

Income elasticity > 1: big-screen televisions (luxury good)

0 < Income elasticity < 1: gasoline (necessity)

Suppose that due to unfavorable growing conditions, this year's global coffee crop was unusually small. What can we assume about the short-run price elasticity of supply and demand for coffee?

Assumption:

- The short-run price elasticity of demand will be inelastic

- The short-run price elasticity of supply will be inelastic

Not an Assumption:

- The short-run price elasticity of demand will be elastic

The short-run price elasticity of supply will be elastic

During the weekends, Juanita competes in eSports video game tournaments. She takes her computer to different events and plays her favorite computer-based video game, "ECON Legends 2." Juanita has won enough money from playing in tournaments to purchase a new computer.

Order the scenarios below starting with the case where Juanita's price elasticity of demand would be the most elastic to least elastic (which is very inelastic).

1st: Juanita's current computer works well and puts her at no disadvantage compared to other players, but she things the computer itself is ugly

2nd: Juanita has been notified that an update for "ECON Legends 2" will be coming out in 3-6 months from now. The updated game will still run on her computer, but it will likely run much better on some of her competitors' computers

3rd: Juanita's computer was damaged in a lightning storm, and it no longer works at all

Describe how time affects the elasticity of supply.

In the _____ run, a producer may have difficulty increasing its _____, which makes supply _____. However, in the _____ run the producer may be able to increase the quantity supplied to make its supply more _____.

short, supply, inelastic, long, elastic

Fill in the blanks to complete the passage about income and inferior goods.

When consumers have more money, they are _____ likely to purchase inferior goods. When this is the case, it means that _____ elasticity of demand is _____: as income goes up, demand goes _____.

less, income, negative, down

Determine the price elasticity of demand for a microwave that experienced a 20% drop in price and a 50% increase in weekly quantity demanded.

-2.5

(0.5 / -0.2)

If demand for oil increases, what can we assume about the price elasticity of supply and demand?

Assumption:

- The price elasticity of supply will be inelastic in the short run.

- The price elasticity of demand will be inelastic in the short run.

- The price elasticity of demand will be more elastic in the long run.

- The price elasticity of supply will be more elastic in the long run.

Not an Assumption:

- The price elasticity of demand will be elastic in the short run.

- The price elasticity of supply will be inelastic in the long run.

The graph shows the short- and long-run price elasticity of demand and supply in a situation where demand for corn has increased. Match each label on the graph to the appropriate description.

Q2: short-run quantity supplied

Q3: long-run quantity supplied

E2: equilibrium point before corn producers can meet increased demand

E3: equilibrium point once corn producers can meet increased demand

What are some strategies producers can use to maintain an elastic supply, so that they can quickly respond to changes in prices?

Strategy to Maintain an Elastic Supply:

- Producers can have spare production capacity

- Producers can store extra goods

- Producers can relocate to a place where prices are higher

Not a Strategy to Maintain an Elastic Supply:

- Producers can lower their price

- Producers can increase their price

Why do economists use the midpoint method to calculate the price elasticity of demand between demand/price combination (Q1, P1) and combination (Q2, P2)?

A simple calculation of the price elasticity of demand will yield _____ results depending on whether one considers the change as going from (Q1, P1) to (Q2, P2) or in the reverse direction. The midpoint method gives the same answer either way because it uses _____ price and _____ quantity as the basis for the _____ change calculations.

different, average, average, percentage

Talia's income has increased from $500 to $1,000 a week. As a result of this, Talia's consumption of tacos at Margarita's Mexican Grill has increased from 10 tacos a week to 50 tacos a week. What is Talia's income elasticity of demand, using the midpoint method?

2

(% change in quantity demanded/avg. quantity demanded) / (% change in income/ avg. income)