# Interpreting Price Elasticity of Demand

Size: px
Start display at page:

Transcription

1 INTRO Go to page: Go to chapter Bookmarks Printed Page 466 Interpreting Price 9 Behind the 48.2 The Price of Supply 48.3 An Menagerie Producer 49.1 Consumer and the 49.2 Producer and the 50.1 Consumer, Producer The difference between elastic and inelastic demand The relationship between elasticity and total revenue Changes in the price elasticity of demand along a demand curve The factors that determine price elasticity of demand :47:39 PM]

2 Section 47.1 Go to page: Go to chapter Bookmarks 9 Behind the Price Along the What Factors Determine the Price? 48.2 The Price of Supply 48.3 An Menagerie Producer 49.1 Consumer and the 49.2 Producer and the 50.1 Consumer, Producer Interpreting the Price of Med-Stat and other pharmaceutical distributors believed they could sharply drive up flu vaccine prices in the face of a shortage because the price elasticity of vaccine demand was low. But what does that mean? How low does a price elasticity have to be for us to classify it as low? How high does it have to be for us to consider it high? And what determines whether the price elasticity of demand is high or low, anyway? To answer these questions, we need to look more deeply at the price elasticity of demand. Interpreting the Price of Dem... Printed Page :48:21 PM]

3 Section Go to page: Go to chapter Bookmarks 9 Behind the Price Along the What Factors Determine the Price? 48.2 The Price of Supply 48.3 An Menagerie Producer 49.1 Consumer and the 49.2 Producer and the 50.1 Consumer, Producer As a first step toward classifying price elasticities of demand, let s look at the extreme cases. First, consider the demand for a good when people pay no attention to the price of, say, shoelaces. Suppose that consumers would buy 1 billion pairs of shoelaces per year regardless of the price. If that were true, the demand curve for shoelaces would look like the curve shown in panel (a) of Figure 47.1: it would be a vertical line at 1 billion pairs of shoelaces. Since the percent change in the quantity demanded is zero for any change in the price, the price elasticity of demand in this case is zero. The case of a zero price elasticity of demand is known as perfectly inelastic demand. The opposite extreme occurs when even a tiny rise in the price will cause the quantity demanded to drop to zero or even a tiny fall in the price will cause the quantity demanded to get extremely large. Panel (b) of Figure 47.1 shows the case of pink tennis balls; we suppose that tennis players really don t care what color their balls are and that other colors, such as neon green and vivid yellow, are available at \$5 per dozen balls. In this case, consumers will buy no pink balls if they cost more than \$5 per dozen but will buy only pink balls if they cost less than \$5. The demand curve will therefore be a horizontal line at a price of \$5 per dozen balls. As you move back and forth along this line, there is a change in the quantity demanded but no change in the price. When you divide a number by zero, you get infinity, denoted by the symbol. So a horizontal demand curve implies an infinite price elasticity of demand. When the price elasticity of demand is infinite, economists say that demand is perfectly elastic. The price elasticity of demand for the vast majority of goods is somewhere between these two extreme cases. Economists use one main criterion for classifying these intermediate cases: they ask whether the price elasticity of demand is greater or less than 1. When the price elasticity of demand is greater than 1, economists say that demand is elastic. When the price elasticity of demand is less than 1, they say that demand is inelastic. The borderline case is unit-elastic demand, where the price elasticity of demand is surprise exactly 1. To see why a price elasticity of demand equal to 1 is a useful dividing line, let s consider a hypothetical example: a toll bridge operated by the state highway department. Other things equal, the number of drivers who use the bridge depends on the toll, the price the highway department charges for crossing the bridge: the higher the toll, the fewer the drivers who use the bridge. Figure 47.2 shows three hypothetical demand curves one in which demand is unit-elastic, one in which it is inelastic, and one in which it is elastic. In each case, point A shows the quantity demanded if the toll is \$0.90 and point B shows the quantity demanded if the toll is \$1.10. An increase in the Printed Page 466 is perfectly inelastic when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line. is perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line. is elastic if the price elasticity of demand is greater than 1, inelastic if the price elasticity of demand is less than 1, and unitelastic if the price elasticity of demand is exactly 1. When the Bay Area Toll Authority deliberated a toll increase from \$4 to \$6 for San Franciso s Bay Bridge in 2010, at issue was the price elasticity of demand, which would determine the resulting drop in use. Photodisc 5:48:44 PM]

4 toll from \$0.90 to \$1.10 is an increase of 20% if we use the midpoint method to calculate percent changes. Panel (a) shows what happens when the toll is raised from \$0.90 to \$1.10 and the demand curve is unit-elastic. Here the 20% price rise leads to a fall in the quantity of cars using the bridge each day from 1,100 to 900, which is a 20% decline (again using the midpoint method). So the price elasticity of demand is 20%/20% = 1. Panel (b) shows a case of inelastic demand when the toll is raised from \$0.90 to \$1.10. The same 20% price rise reduces the quantity demanded from 1,050 to 950. That s only a 10% decline, so in this case the price elasticity of demand is 10%/20% = 0.5. Panel (c) shows a case of elastic demand when the toll is raised from \$0.90 to \$1.10. The 20% price increase causes the quantity demanded to fall from 1,200 to 800, a 40% decline, so the price elasticity of demand is 40%/20% = 2. Why does it matter whether demand is unit-elastic, inelastic, or elastic? Because this classification predicts how changes in the price of a good will affect the total revenue earned by producers from the sale of that good. In many real-life situations, such as the one faced by Med-Stat, it is crucial to know how price changes affect total revenue. Total revenue is defined as the total value of sales of a good or service: the price multiplied by the quantity sold. (47 1) Total revenue = Price Quantity sold Total revenue has a useful graphical representation that can help us understand why knowing the price elasticity of demand is crucial when we ask whether a price rise will increase or reduce total revenue. Panel (a) of Figure 47.3 shows the same demand curve as panel (a) of Figure We see that 1,100 drivers will use the bridge if the toll is \$0.90. So the total revenue at a price of \$0.90 is \$0.90 1,100 = \$990. This value is equal to the area of the green rectangle, which is drawn with the bottom left corner at the point (0, 0) and the top right corner at (1,100, 0.90). In general, the total revenue at any given price is equal to the area of a rectangle whose height is the price and whose width is the quantity demanded at that price. Total revenue is the total value of sales of a good or service. It is equal to the price multiplied by the quantity sold. 5:48:44 PM]

5 To get an idea of why total revenue is important, consider the following scenario. Suppose that the toll on the bridge is currently \$0.90 but that the highway department must raise extra money for road repairs. One way to do this is to raise the toll on the bridge. But this plan might backfire, since a higher toll will reduce the number of drivers who use the bridge. And if traffic on the bridge dropped a lot, a higher toll would actually reduce total revenue instead of increasing it. So it s important for the highway department to know how drivers will respond to a toll increase. We can see graphically how the toll increase affects total bridge revenue by examining panel (b) of Figure At a toll of \$0.90, total revenue is given by the sum of the areas A and B. After the toll is raised to \$1.10, total revenue is given by the sum of areas B and C. So when the toll is raised, revenue represented by area A is lost but revenue represented by area C is gained. These two areas have important interpretations. Area C represents the revenue gain that comes from the additional \$0.20 paid by drivers who continue to use the bridge. That is, the 900 who continue to use the bridge contribute an additional \$ = \$180 per day to total revenue, represented by area C. But 200 drivers who would have used the bridge at a price of \$0.90 no longer do so, generating a loss to total revenue of \$ = \$180 per day, represented by area A. (In this particular example, because demand is unit-elastic the same as in panel (a) of Figure 47.2 the rise in the toll has no effect on total revenue; areas A and B are the same size.) Except in the rare case of a good with perfectly elastic or perfectly inelastic demand, when a seller raises the price of a good, two countervailing effects are present: A price effect. After a price increase, each unit sold sells at a higher price, which tends to raise revenue. A quantity effect. After a price increase, fewer units are sold, which tends to lower revenue. But then, you may ask, what is the net ultimate effect on total revenue: does it go up or down? The answer is that, in general, the effect on total revenue can go either way a price rise may either increase total revenue or lower it. If the price effect, which tends to raise total revenue, is the stronger of the two effects, then total revenue goes up. If the quantity effect, which tends to reduce total revenue, is the stronger, then total revenue goes down. And if the strengths of the two effects are exactly equal as in our toll bridge example, where a \$180 gain offsets a \$180 loss total revenue is unchanged by the price increase. The price elasticity of demand tells us what happens to total revenue when price changes: its size determines which effect the price effect or the quantity effect is stronger. Specifically: If demand for a good is unit-elastic (the price elasticity of demand is 1), an increase in price does not change total revenue. In this case, the quantity effect and the price effect exactly offset each other. If demand for a good is inelastic (the price elasticity of demand is less than 5:48:44 PM]

6 1), a higher price increases total revenue. In this case, the price effect is stronger than the quantity effect. If demand for a good is elastic (the price elasticity of demand is greater than 1), an increase in price reduces total revenue. In this case, the quantity effect is stronger than the price effect. Table 47.1 shows how the effect of a price increase on total revenue depends on the price elasticity of demand, using the same data as in Figure An increase in the price from \$0.90 to \$1.10 leaves total revenue unchanged at \$990 when demand is unit-elastic. When demand is inelastic, the price effect dominates the quantity effect; the same price increase leads to an increase in total revenue from \$945 to \$1,045. And when demand is elastic, the quantity effect dominates the price effect; the price increase leads to a decline in total revenue from \$1,080 to \$880. [Open in Supplemental Window] The price elasticity of demand also predicts the effect of a fall in price on total revenue. When the price falls, the same two countervailing effects are present, but they work in the opposite directions as compared to the case of a price rise. There is the price effect of a lower price per unit sold, which tends to lower revenue. This is countered by the quantity effect of more units sold, which tends to raise revenue. Which effect dominates depends on the price elasticity. Here is a quick summary: When demand is unit-elastic, the two effects exactly balance each other out; so a fall in price has no effect on total revenue. When demand is inelastic, the price effect dominates the quantity effect; so a fall in price reduces total revenue. When demand is elastic, the quantity effect dominates the price effect; so a fall in price increases total revenue. 5:48:44 PM]

7 Section Go to page: Go to chapter Bookmarks Price Along the Printed Page Behind the Price Along the What Factors Determine the Price? 48.2 The Price of Supply 48.3 An Menagerie Producer 49.1 Consumer and the 49.2 Producer and the 50.1 Consumer, Producer Suppose an economist says that the price elasticity of demand for coffee is What he or she means is that at the current price the elasticity is In the previous discussion of the toll bridge, what we were really describing was the elasticity at the price of \$0.90. Why this qualification? Because for the vast majority of demand curves, the price elasticity of demand at one point along the curve is different from the price elasticity of demand at other points along the same curve. To see this, consider the table in Figure 47.4, which shows a hypothetical demand schedule. It also shows in the last column the total revenue generated at each price and quantity combination in the demand schedule. The upper panel of the graph in Figure 47.4 shows the corresponding demand curve. The lower panel illustrates the same data on total revenue: the height of a bar at each quantity demanded which corresponds to a particular price measures the total revenue generated at that price. In Figure 47.4, you can see that when the price is low, raising the price increases total revenue: starting at a price of \$1, raising the price to \$2 increases total revenue from \$9 to \$16. This means that when the price is low, demand is inelastic. Moreover, you can see that demand is inelastic on the entire section of the demand curve from a price of \$0 to a price of \$5. When the price is high, however, raising it further reduces total revenue: starting at a price of \$8, for example, raising the price to \$9 reduces total revenue, from \$16 to \$9. This means that when the price is high, demand is elastic. Furthermore, you can see that demand is elastic over the section of the demand curve from a price of \$5 to \$10. For the vast majority of goods, the price elasticity of demand changes along the demand curve. So whenever you measure a good s elasticity, you are really measuring it at a particular point or section of the good s demand curve. Price Along the 5:49:35 PM]

8 Section Go to page: Go to chapter Bookmarks 9 Behind the Price Along the What Factors Determine the Price? 48.2 The Price of Supply 48.3 An Menagerie Producer 49.1 Consumer and the 49.2 Producer and the 50.1 Consumer, Producer What Factors Determine the Price? The flu vaccine shortfall of allowed vaccine distributors to significantly raise their prices for two important reasons: there were no substitutes, and for many people the vaccine was a medical necessity. People responded in various ways. Some paid the high prices, and some traveled to Canada and other countries to get vaccinated. Some simply did without (and over time often changed their habits to avoid catching the flu, such as eating out less often and avoiding mass transit). This experience illustrates the four main factors that determine elasticity: whether close substitutes are available, whether the good is a necessity or a luxury, the share of income a consumer spends on the good, and how much time has elapsed since the price change. We ll briefly examine each of these factors. Whether Close Substitutes Are Available The price elasticity of demand tends to be high if there are other goods that consumers regard as similar and would be willing to consume instead. The price elasticity of demand tends to be low if there are no close substitutes. Whether the Good Is a Necessity or a Luxury The price elasticity of demand tends to be low if a good is something you must have, like a lifesaving medicine. The price elasticity of demand tends to be high if the good is a luxury something you can easily live without. Share of Income Spent on the Good The price elasticity of demand tends to be low when spending on a good accounts for a small share of a consumer s income. In that case, a significant change in the price of the good has little impact on how much the consumer spends. In contrast, when a good accounts for a significant share of a consumer s spending, the consumer is likely to be very responsive to a change in price. In this case, the price elasticity of demand is high. Time In general, the price elasticity of demand tends to increase as consumers have more time to adjust to a price change. This means that the long-run price elasticity of demand is often higher than the short-run elasticity. istockphoto A good illustration of the effect of time on the elasticity of demand is drawn from the 1970s, the first time gasoline prices increased dramatically in the United States. Initially, consumption fell very little because there were no close substitutes for gasoline and because driving their cars was necessary for people to carry out the ordinary tasks of life. Over time, however, Americans changed their habits in ways that enabled them to gradually reduce their gasoline consumption. The result was a steady decline in gasoline consumption over the next decade, even Mike Thompson, Detroit Free Press. Reprinted by Permission. though the price of gasoline did not continue to rise, confirming that the long-run price elasticity of demand for gasoline was indeed much larger than the short-run elasticity. fyi Printed Page 472 Responding to Your Tuition Bill College costs more than ever and not just because of overall inflation. Tuition has been rising faster than the overall cost of living for years. But does rising tuition keep people from going to college? Two studies found that the answer depends on the type of college. Both studies assessed how responsive the decision to go to college is to a change in tuition. A 1988 study found that a 3% increase in tuition led to an approximately 2% fall in the number of students enrolled at four-year institutions, giving a price elasticity of demand of 0.67 (2%/3%). In the case of two-year institutions, the study found a significantly higher response: a 3% increase in tuition led to a 2.7% fall in enrollments, giving a price elasticity of demand of 0.9. In other words, the enrollment decision for students at two-year colleges was significantly more responsive to price than for students at four-year colleges. The result: students at two-year colleges are more likely to forgo getting a degree because of tuition costs than students at four-year colleges. A 1999 study confirmed this pattern. In comparison to four-year colleges, it found that two-year college enrollment rates were significantly more responsive to changes in state financial aid (a decline in aid 5:49:58 PM]

9 leading to a decline in enrollments), a predictable effect given these students greater sensitivity to the cost of tuition. Another piece of evidence suggests that students at two-year colleges are more likely to be paying their own way and making a trade-off between attending college and working: the study found that enrollments at two-year colleges are much more responsive to changes in the unemployment rate (an increase in the unemployment rate leading to an increase in enrollments) than enrollments at fouryear colleges. So is the cost of tuition a barrier to getting a college degree in the United States? Yes, but more so at two-year colleges than at four-year colleges. Interestingly, the 1999 study found that for both two-year and four-year colleges, price sensitivity of demand had fallen somewhat since the 1988 study. One possible explanation is that because the value of a college education has risen considerably over time, fewer people forgo college, even if tuition goes up. (See source note on copyright page.) What Factors Determine the Price Elastic :49:58 PM]

### Topic 4c. Elasticity. What is the difference between this. and this? 1 of 23

Topic 4c Elasticity What is the difference between this and this? 1 of 23 Defining and Measuring Elasticity (I) Price elasticity of demand Ø The price elasticity of demand is the ratio of the percent change

### Chapter 6 Elasticity: The Responsiveness of Demand and Supply

Economics 6 th edition 1 Chapter 6 Elasticity: The Responsiveness of Demand and Supply Modified by Yulin Hou For Principles of Microeconomics Florida International University Fall 2017 The Price Elasticity

### CHAPTER 4, SECTION 1

DAILY LECTURE CHAPTER 4, SECTION 1 Understanding Demand What Is Demand? Demand is the willingness and ability of buyers to purchase different quantities of a good, at different prices, during a specific

### CHAPTER 4: DEMAND. Lesson 3: elasticity of demand

CHAPTER 4: DEMAND Lesson 3: elasticity of demand 3 CASES OF DEMAND ELASTICITY Because quantity demanded depends on its price, economists use a concept called elasticity. Elasticity is a measure of responsiveness

What are the effects of a high gas price on buying plans? You can see some of the biggest effects at car dealers lots, where SUVs remain unsold while sub-compacts sell in greater quantities. But how big

### Chapter 6 Elasticity: The Responsiveness of Demand and Supply

hapter 6 Elasticity: The Responsiveness of emand and Supply 1 Price elasticity of demand measures: how responsive to price changes suppliers are. how responsive sales are to changes in the price of a related

### Chapter 6 Lecture - Elasticity: The Responsiveness of Demand and Supply

Chapter 6 Lecture - Elasticity: The Responsiveness of Demand and Supply 1 The Price Elasticity of Demand and Its Measurement We define price elasticity of demand and understand how to measure it. Although

### Formula: Price of elasticity of demand= Percentage change in quantity demanded Percentage change in price

1 MICRO ECONOMICS~ CHAPTER FOUR CHAPTER FOUR PRICE ELASTICITY OF DEMAND You know that when supply increases, the equilibrium price falls and the equilibrium quantity increases THE PRICE ELASTICITY OF DEMAND~

### Lesson-9. Elasticity of Supply and Demand

Lesson-9 Elasticity of Supply and Demand Price Elasticity Businesses know that they face demand curves, but rarely do they know what these curves look like. Yet sometimes a business needs to have a good

### Chapter 4 Review: Demand. CHAPTER 4 Graphic Organizer

Chapter 4 Review: Demand CHAPTER 4 Graphic Organizer CHAPTER 4, SECTION 1 Key Concepts What Is Demand? A market is a place where people buy and sell things. A market has two sides. There is a buying side

### 2. Demand and Supply

2. Demand and Supply The following materials are taken from Chap. 3 to Chap. 7 of Economics, 2 nd ed., Krugman and Wells(2009), Worth Palgrave MaCmillan. 1 of 42 2. Demand and Supply, and Market Equilibrium

### Elasticity and Its Applications

Elasticity and Its Applications 1. In general, elasticity is a. a measure of the competitive nature of a market. b. the friction that develops between buyer and seller in a market. c. a measure of how

### Chapter 4 DEMAND. Essential Question: How do we decide what to buy?

Chapter 4: Demand Section 1 Chapter 4 DEMAND Essential Question: How do we decide what to buy? Key Terms demand: the desire to own something and the ability to pay for it law of demand: consumers will

### Module 61 Introduction to Monopoly

What you will learn in this Module: How a monopolist determines the profit-maximizing price and quantity How to determine whether a monopoly is earning a profit or a loss Module 61 Introduction to Monopoly

### 1. Explain 2. Describe 3. Create 4. Interpret

Law of Demand Section:- B Objectives 1. Explain the law of demand. 2. Describe how the substitution effect and the income effect influence decisions. 3. Create a demand schedule for an individual and a

### To start we will look at the relationship between quantity demanded and price.

University of California, Merced ECO 1-Introduction to Economics Chapter 5 Lecture otes Professor Jason Lee I. Elasticity As we learned in Chapter 4, there is a clear relationship between the quantity

### Mr Sydney Armstrong ECN 1100 Introduction to Microeconomics Lecture Note (4) Price Elasticity of Demand

Mr Sydney Armstrong ECN 1100 Introduction to Microeconomics Lecture Note (4) Price Elasticity of Demand The law of demand tells us that consumers will buy more of a product when its price declines and

### Chapter 5: Price Controls: Multiple Choice Questions Chapter 6: Elasticity Multiple Choice Questions

Chapter 5: Price Controls: Multiple Choice Questions 1. ANSWER: d. ceiling. 2. ANSWER: a. a shortage, which cannot be eliminated through market adjustment. 3. ANSWER: b. the equilibrium price is below

### Case: An Increase in the Demand for the Product

1 Appendix to Chapter 22 Connecting Product Markets and Labor Markets It should be obvious that what happens in the product market affects what happens in the labor market. The connection is that the seller

### Chapter 6. Elasticity

Chapter 6 Elasticity Both the elasticity coefficient and the total revenue test for measuring price elasticity of demand are presented in this chapter. The text discusses the major determinants of price

### At the end of chapter 6, you will be able to:

1 How to Study for Chapter 6 Supply and Equilibrium Chapter 6 introduces the factors that will affect the supply of a product, the price elasticity of supply, and the concept of equilibrium price and equilibrium

### Reading Essentials and Study Guide

Lesson 3 Elasticity of Demand ESSENTIAL QUESTION What are the causes for a change in demand? Reading HELPDESK Academic Vocabulary technical related to a particular subject such as art, science, or trade

### Elasticity and Its Applications. Copyright 2004 South-Western

Elasticity and Its Applications 5 Copyright 2004 South-Western Copyright 2004 South-Western/Thomson Learning Elasticity... allows us to analyze supply and demand with greater precision. is a measure of

### The Basics of Supply and Demand

C H A P T E R 2 The Basics of Supply and Demand Prepared by: Fernando & Yvonn Quijano CHAPTER 2 OUTLINE 2.1 Supply and Demand 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities

### Individual & Market Demand and Supply

Mr Sydney Armstrong ECN 1100 Introduction to Microeconomic Lecture Note (3) Individual & Market Demand and Supply The tools of demand and supply can take us a far way in understanding both specific economic

### Eastern Mediterranean University Faculty of Business and Economics Department of Economics Fall Semester. ECON 101 Mid term Exam

Eastern Mediterranean University Faculty of Business and Economics Department of Economics 2014 15 Fall Semester ECON 101 Mid term Exam Type A 28 November 2014 Duration: 90 minutes Name Surname: Group

### Chapter 4: Demand Section 3

Chapter 4: Demand Section 3 Objectives 1. Explain how to calculate elasticity of demand. 2. Identify factors that effect elasticity. 3. Explain how firms use elasticity and revenue to make decisions. Copyright

### ELASTICITY OF DEMAND. Mr. Cline Economics Marshall High School Unit Two CA

ELASTICITY OF DEMAND Mr. Cline Economics Marshall High School Unit Two CA The Correct Response Is.. Economists describe the ways in which consumers respond to price changes as Elasticity of Demand. Are

### The Basics of Supply and Demand

C H A P T E R 2 The Basics of Supply and Demand Prepared by: Fernando & Yvonn Quijano CHAPTER 2 OUTLINE 2.1 Supply and Demand 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities

### 2007 Thomson South-Western

Elasticity... allows us to analyze supply and demand with greater precision. is a measure of how much buyers and sellers respond to changes in market conditions THE ELASTICITY OF DEMAND The price elasticity

### ELASTICITY OF DEMAND AND SUPPLY - MARKETS IN ACTION

WEEK 3 /LECTURE 3 NOTES ELASTICITY OF DEMAND AND SUPPLY - MARKETS IN ACTION Introduction We begin this session by examining elasticity, one of the most important concepts in economics. Let s assume that

### ECON 200. Introduction to Microeconomics

ECON 200. Introduction to Microeconomics Homework 3 Part I Name: [Multiple Choice] 1. A life-saving medicine without any close substitutes will tend to have (a) a. a small elasticity of demand. b. a large

### ECON 101 MIDTERM 1 REVIEW SESSION SOLUTIONS (WINTER 2015) BY BENJI HUANG

ECON 101 MIDTERM 1 REVIEW SESSION SOLUTIONS (WINTER 2015) BY BENJI HUANG TABLE OF CONTENT I. CHAPTER 1: WHAT IS ECONOMICS II. CHAPTER 2: THE ECONOMIC PROBLEM III. CHAPTER 3: DEMAND AND SUPPLY IV. CHAPTER

### ECON 102 Micro Principles Exercise 2. Multiple Choice Questions. Choose the best answer July 24,2008

1 ECON 102 Micro Principles Exercise 2 Multiple Choice Questions. Choose the best answer July 24,2008 1. When marginal benefit (MB) is greater than marginal cost (MC) A) the economy produces too little

### The Concept of Elasticity. The Elasticity of Demand. Laugher Curve. The Concept of Elasticity. Sign of Price Elasticity.

The oncept of Elasticity The Elasticity of Demand Elasticity is a measure of the responsiveness of one variable to another. The greater the elasticity, the greater the responsiveness. hapter Laugher urve

### This is the midterm 1 solution guide for Fall 2012 Form A. 1) The answer to this question is A, corresponding to Form A.

This is the midterm 1 solution guide for Fall 2012 Form A. 1) The answer to this question is A, corresponding to Form A. 2) Since widgets are an inferior good (like ramen noodles) and income increases,

### Econ 200 Lecture 7 January 24, 2017

1. Learning Catalytics Session 2. Elasticity and Total Revenue Econ 200 Lecture 7 January 24, 2017 3. Cross-Price and Income Elasticities 4. Elasticity of Supply 5. Consumer & Producer Surplus 1 Total

### SHORT QUESTIONS AND ANSWERS FOR ECO402

SHORT QUESTIONS AND ANSWERS FOR ECO402 Question: How does opportunity cost relate to problem of scarcity? Answer: The problem of scarcity exists because of limited production. Thus, each society must make

### DEMAND. Economics Unit 2 Just the Facts Handout

DEMAND Economics Unit 2 Just the Facts Handout What is Demand? A market is a place where people buy and sell things. A market has two sides. There is a buying side and a selling side. The buying side of

### Elasticity and Its Application

Elasticity and Its Application Elasticity... is a measure of how much buyers and sellers respond to changes in market conditions allows us to analyze supply and demand with greater precision. Journal Question-Name

### Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay. Lecture -29 Monopoly (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M School of Management Indian Institute of Technology, Bombay Lecture -29 Monopoly (Contd ) In today s session, we will continue our discussion on monopoly.

### Answers to the Take-Home Midterm Examination

Answers to the Take-Home Midterm Examination Econ 111s Spring/Summer 2009 Economics Department, Queen s University Instructor: Jean-Denis Garon Posted: June 19 Here are the main elements of the answers.

### PRICING IN COMPETITIVE MARKETS

PRICING IN COMPETITIVE MARKETS Some markets, such as those for agricultural commodities and gasoline, seem to have just one price at any given time. All producers in the market charge the same or very

### Chapter 2 The Basics of Supply and Demand

Chapter 2 The Basics of Supply and Demand Read Pindyck and Rubinfeld (2013), Chapter 2 Microeconomics, 8 h Edition by R.S. Pindyck and D.L. Rubinfeld Adapted by Chairat Aemkulwat for Econ I: 2900111 Chapter

### 1. The rate at which buyers exchange money for a good or service is known as the price.

Chapter 02 Demand and Supply True / False Questions 1. The rate at which buyers exchange money for a good or service is known as the price. Explanation: The rate at which the buyer and seller exchange

### ECON 203 Homework #2 Solutions. 1) Can a set of indifference curves be upward sloping? If so, what would this tell you about the two goods?

1) Can a set of indifference curves be upward sloping? If so, what would this tell you about the two goods? A set of indifference curves can be upward sloping if we violate assumption number three; more

### a. Graph the demand curve in figure 1. Page 1 Practice Homework Elasticity Economics 101 The Economic Way of Thinking

Price Practice Homework ity Economics 101 The Economic Way of Thinking 1. The table below shows demand data for fountain soft drinks. Columns 4 and 5 show the average percent change in price and quantity

### Students: Go to: m.socrative.com Room #: When prompted to use your tech, answer the on-screen question.

Students: Go to: m.socrative.com Room #: 897089 When prompted to use your tech, answer the on-screen question. Using Your Tech: T/F: Consumers were Panic in 2004 Flu vaccine contamination Half of the U.S.

### MICROECONOMICS SECTION I. Time - 70 minutes 60 Questions

MICROECONOMICS SECTION I Time - 70 minutes 60 Questions Directions: Each of the questions or incomplete statements below is followed by five suggested answers or completions. Select the one that is best

### University of Toronto October 17, ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 1

Department of Economics Prof. Gustavo Indart University of Toronto October 17, 2008 SOLUTIONS ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The

### Macro Unit 1b. This is what we call a demand schedule. It is a table that shows how much consumers are willing and able to purchase at various prices.

Macro Unit 1b Demand Market: an institution or mechanism, which brings together buyers ("demanders") and sellers ("suppliers") of particular goods and services. Notice that the remainder of this unit assumes

### INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION

ECO105 (F) / Page 1 of 12 Section A INTI COLLEGE MALAYSIA FOUNDATION IN BUSINESS INFORMATION TECHNOLOGY (CFP) ECO105: ECONOMICS 1 FINAL EXAMINATION: JANUARY 2006 SESSION Instructions: This section consists

### Module 18 Aggregate Supply: Introduction and Determinants

Module 18 Supply: Introduction and Determinants What you will learn in this Module: How the aggregate supply curve illustrates the relationship between the aggregate price level and the quantity of aggregate

### Preview from Notesale.co.uk Page 6 of 89

Guns Butter 200 0 175 75 130 125 70 150 0 160 What it shows: the maximum combinations of two goods an economy can produce with its existing resources and technology; an economy can produce at points on

### Microeconomics: Principles, Applications, and Tools

Microeconomics: Principles, Applications, and Tools NINTH EDITION Chapter 5 Elasticity: A Measure of Responsiveness Learning Objectives 5.1 List the determinants of the price elasticity of demand 5.2 Use

### AP Microeconomics Chapter 6 Outline

I. Introduction AP Microeconomics Chapter 6 A. Learning Objectives In this chapter students should learn: 1. What price elasticity of demand is and how it can be applied. 2. The usefulness of the total

### Chapter Summary and Learning Objectives

CHAPTER 11 Firms in Perfectly Competitive Markets Chapter Summary and Learning Objectives 11.1 Perfectly Competitive Markets (pages 369 371) Explain what a perfectly competitive market is and why a perfect

### FAQ: Decision-Making Strategies

Q&A: Decision-Making Strategies Question 1: What is supply and demand? Answer 1: Supply refers to the actions of firms to create, distribute, and market goods and services. Firms create products that they

### ELASTICITY. Chapt er. Key Concepts

Chapt er 4 ELASTICITY Key Concepts Price Elasticity of Demand The price elasticity of demand is a units-free measure of responsiveness of the quantity demanded of a good to a change in its price when all

### !"#\$#%&"'()#*(+,'&\$-''(.#/-'((

Lecture 1 Basic Concerns of Economics What is Economics! Economics is the study of how society manages its scarce resources. o Economic Problem: How a society can satisfy unlimited wants with limited resources

### not to be republished NCERT Chapter 6 Non-competitive Markets 6.1 SIMPLE MONOPOLY IN THE COMMODITY MARKET

Chapter 6 We recall that perfect competition was theorised as a market structure where both consumers and firms were price takers. The behaviour of the firm in such circumstances was described in the Chapter

### MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. FIGURE 1-2

Questions of this SAMPLE exam were randomly chosen and may NOT be representative of the difficulty or focus of the actual examination. The professor did NOT review these questions. MULTIPLE CHOICE. Choose

### Econ 1101 Spring 2013 Week 3. Section 038 2/6/2013

Econ 1101 Spring 2013 Week 3 Section 038 2/6/2013 Announcements Homework 2 due Friday night at 11:45pm, CST 2 Agenda for today 1. The concept of elasticity 2. Related case study 3. Income elasticity of

### Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 1

Economics 2 Spring 2019 rofessor Christina Romer rofessor David Romer SUGGESTED ANSWERS TO ROBLEM SET 1 1.a. Opportunity cost is defined as the value of what is forgone to undertake an activity. What you

### AP Microeconomics Chapter 3 Outline

I. Learning Objectives In this chapter students should learn: II. Markets III. Demand A. What demand is and how it can change. B. What supply is and how it can change. C. How supply and demand interact

### Midterm 2 - Solutions

Ecn 100 - Intermediate Microeconomic Theory University of California - Davis November 13, 2009 Instructor: John Parman Midterm 2 - Solutions You have until 11:50am to complete this exam. Be certain to

### 6. The law of diminishing marginal returns begins to take effect at labor input level: a. 0 b. X c. Y d. Z

Chapter 5 MULTIPLE-CHOICE QUESTIONS 1. The short run is defined as a period in which: a. the firm cannot change its output level b. all inputs are variable but technology is fixed c. input prices are fixed

### The law of supply states that higher prices raise the quantity supplied. The price elasticity of supply measures how much the quantity supplied

In a competitive market, the demand and supply curve represent the behaviour of buyers and sellers. The demand curve shows how buyers respond to price changes whereas the supply curve shows how sellers

### Key Topics demand law of demand change in quantity demanded change in demand determinants of demand

54 Chapter 5 DEMAND Key Topics demand law of demand change in quantity demanded change in demand determinants of demand Goals know the definition of demand understand that demand slopes downward to the

### Microeconomics. Use the graph below to answer question number 3

More Tutorial at Microeconomics 1. Opportunity costs are the values of the: a. minimal budgets of families on welfare b. hidden charges passed on to consumers c. monetary costs of goods and services *

### Microeconomics. Use the graph below to answer question number 3

More Tutorial at Microeconomics 1. Opportunity costs are the values of the: a. minimal budgets of families on welfare b. hidden charges passed on to consumers c. monetary costs of goods and services *

### Understanding Price Elasticity: It s No Stretch!

Understanding Price Elasticity: It s No Stretch! Lesson by Lesley Mace, senior economic and financial education specialist, Federal Reserve Bank of Atlanta, Jacksonville Branch Lesson description An important

### 2000 AP Microeconomics Exam Answers

2000 AP Microeconomics Exam Answers 1. B Scarcity is the main economic problem!!! 2. D If the wages of farm workers and movie theater employee increase, the supply of popcorn and movies will decrease (shift

### Page 1. AP Economics Mid-Term January 2006 NAME: Date:

AP Economics Mid-Term January 2006 NAME: Date: 1. Rationality, in the case of firms, is taken to mean that they strive to A. maximize profits. B. charge the highest possible price. C. maximize revenues.

### Chapter 19 Demand and Supply Elasticity

Chapter 19 Demand and Supply Elasticity Learning Objectives After you have studied this chapter, you should be able to 1. define price elasticity of demand, elastic demand, unit elastic demand, inelastic

### Bremen School District 228 Social Studies Common Assessment 2: Midterm

Bremen School District 228 Social Studies Common Assessment 2: Midterm AP Microeconomics 55 Minutes 60 Questions Directions: Each of the questions or incomplete statements in this exam is followed by five

### Topic 3. Demand and Supply

Econ 103 Topic 3 page 1 Topic 3 Demand and Supply Text reference: Chapter 3 and 4. Assumptions of the competitive model. Demand: -Determinants of demand -Demand curves -Consumer surplus -Divisibility -

### McBride ECON Formative Quiz 4.1 and 4.2

Name: Class: _ Date: _ ID: A McBride ECON Formative Quiz 4.1 and 4.2 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which is an example of the law of

### 541: Economics for Public Administration Lecture 8 Short-Run Costs & Supply

I. Introduction 541: Economics for Public Administration Lecture 8 Short-Run s & Supply We have presented how a business finds the least cost way of providing a given level of public good or service. In

### Elasticity and Its Applications PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD

Elasticity and Its Applications PRINCIPLES OF ECONOMICS (ECON 210) BEN VAN KAMMEN, PHD Introduction This is the first of 4 chapters that comprise the middle of this course. These chapters are extensions

### Chapter 13. Microeconomics. Monopolistic Competition: The Competitive Model in a More Realistic Setting

Microeconomics Modified by: Yun Wang Florida International University Spring, 2018 1 Chapter 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting Chapter Outline 13.1 Demand and

### The price elasticity of demand when price decreases from \$9 to \$7 is A B C D -1.

Varsity Economics Product Market: Elasticity 1 The price elasticity of demand is a measure of the A effect of changes in demand on the price. B relationship between price and profitability. C responsiveness

### 2013 Pearson. What do you do when the price of gasoline rises?

What do you do when the price of gasoline rises? Elasticities of Demand and Supply 5 When you have completed your study of this chapter, you will be able to 1 Define the price elasticity of demand, and

### 1 of 14 5/1/2014 4:56 PM

1 of 14 5/1/2014 4:56 PM Any point on the budget constraint Gives the consumer the highest level of utility. Represent a combination of two goods that are affordable. Represents combinations of two goods

### Ch. 7 outline. 5 principles that underlie consumer behavior

Ch. 7 outline The Fundamentals of Consumer Choice The focus of this chapter is on how consumers allocate (distribute) their income. Prices of goods, relative to one another, have an important role in how

### Monopoly. 3 Microeconomics LESSON 5. Introduction and Description. Time Required. Materials

LESSON 5 Monopoly Introduction and Description Lesson 5 extends the theory of the firm to the model of a Students will see that the profit-maximization rules for the monopoly are the same as they were

### ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 1

Department of Economics Prof. Gustavo Indart University of Toronto October 17, 2008 ECO 100Y INTRODUCTION TO ECONOMICS Midterm Test # 1 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total time

### ECON 1001 A. Come to the PASS workshop with your mock exam complete. During the workshop you can work with other students to review your work.

It is most beneficial to you to write this mock midterm UNDER EXAM CONDITIONS. This means: Complete the midterm in 1.5 hour(s). Work on your own. Keep your notes and textbook closed. Attempt every question.

### Chapter 4: Demand. Section I: Understanding Demand. Section II: Shifts of the Demand Curve. Section III: Elasticity of Demand

Chapter 4: Demand Section I: Understanding Demand Section II: Shifts of the Demand Curve Section III: Elasticity of Demand Section 1: Understanding Demand LEQ: What is the law of demand? VOCAB: demand

### Lecture 3 Mankiw chapters 4 and 5

In-Class Exam 1 1) Efficiency is not the same than equity. Why? Give an example in which an efficient allocation has been achieved but it creates significant inequalities. 2) Explain each of the following

### SOLUTIONS TO TEXT PROBLEMS 6

SOLUTIONS TO TEXT PROBLEMS 6 Quick Quizzes 1. A price ceiling is a legal maximum on the price at which a good can be sold. Examples of price ceilings include rent control, price controls on gasoline in

### Professor Christina Romer SUGGESTED ANSWERS TO PROBLEM SET 2

Economics 2 Spring 2016 rofessor Christina Romer rofessor David Romer SUGGESTED ANSWERS TO ROBLEM SET 2 1.a. Recall that the price elasticity of supply is the percentage change in quantity supplied divided

### ELASTICITY AND ITS APPLICATION

5 ELASTICITY AND ITS APPLICATION Questions for Review 1. If demand is elastic, an increase in price reduces total revenue. With elastic demand, the quantity demanded falls by a greater percentage than

### STANDARD XII (ISC) ECONOMICS Chapter 4: Elasticity of Demand

STANDARD XII (ISC) ECONOMICS Chapter 4: Elasticity of Demand Meaning of Elasticity of Demand The term elasticity indicates responsiveness of one variable to a change in another variable. For example, when

### Chapter 2 Market analysis

Chapter 2 Market analysis Market analysis is concerned with collecting and interpreting data about customers and the market so that businesses adopt a relevant marketing strategy. Businesses carry out

### Demand and Supply. Economics

Demand and Supply Economics How Do Demand and Price Interact? Demand = What we are willing and able to buy at various prices. Demand is expressed in terms of a time frame: eg. per day or per week. Quantity

### CHAPTER 3 ELASTICITY AND SURPLUS. Monday, September 19, 11

CHATER 3 ELASTICITY AND SURLUS YOU ARE HERE ELASTICITY One of the most important concepts in economics is elasticity The elasticity of demand and elasticity of supply are basically the slope of the supply

### knows?) What we do know is that S1, S2, S3, and S4 will produce because they are the only ones

Guide to the Answers to Midterm 1, Fall 2010 (Form A) (This was put together quickly and may have typos. You should really think of it as an unofficial guide that might be of some use.) 1. First, it s