1. Ch. 4: Elasticity.
Define, calculate, and explain the factors that influence
the price elasticity of demand
the cross elasticity of demand
the income elasticity of demand
the elasticity of supply

2. Price Elasticity of Demand
The slope of the demand curve affects how much equilibrium price and quantity change for a given change in supply.
If supply increases,
the decrease in price is greater if demand is steeper
The increase in quantity is smaller if demand is steeper

3. Price Elasticity of Demand
units-free measure of the responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus.

4. Price Elasticity of Demand
%DQ = DQ/Qavg
= 2/10
= .2
%DP = DP/Pavg
= -$1/$20
= -.05
e = .2/.05 =4

5. Price Elasticity of Demand
By using the average price and average quantity, we get the same elasticity value regardless of whether the price rises or falls.
Measuring as % changes leaves the elasticity value the same (“units free”).
Although the formula yields a negative value for elasticity because price and quantity move in opposite directions, we report the absolute value.

6. Suppose that quantity demanded rises from 100 to 120 when the price drops from $10 to $9. What is the elasticity of demand (round to the nearest tenth (e.g. 4.2). 0% 30

7. Price Elasticity of Demand
Inelastic and Elastic Demand
if e>1: elastic
if e=1: unit elastic
if e<1: inelastic
Shape of
Perfectly inelastic demand curve (e=0)
Perfectly elastic demand curve (e= infinite)

8. Price Elasticity of Demand
At prices above the mid-point of the demand curve, demand is elastic.
At prices below the mid-point of the demand curve, demand is inelastic.

10. Price Elasticity of Demand
Total Revenue and Elasticity
TR=P*QD
When P changes, TR could rise or fall because QD moves in opposite direction.
But a higher price doesn’t always increase total revenue.

11. Price Elasticity of Demand
%D TR = % D P + % D Q
= % D P - % D P(e)
= % D P(1-e)
If demand is elastic (e>1),
P increase  TR decreases
P decrease  TR increases
If demand is inelastic (e<1),
P increase  TR increases
P decrease  TR decreases
If demand is unitary elastic,
P increase or decrease  TR unchanged.

12. Price Elasticity of Demand
As P falls from $25 to $12.50, D is elastic, and TR rises.
At $12.50, D is unit elastic and TR stops increasing.
As P falls from $12.50 to 0, D is inelastic, and TR decreases.

13. Price Elasticity of Demand

14. Elastic; rises. Elastic; falls. Inelastic; rises. Inelastic; falls.
Suppose that when the price of football tickets rises from $20 to $30, the number of football tickets sold drops from 50,000 to 45,000. Based on this, we can conclude that demand is _____ because total revenue _____ when the price rises.
Elastic; rises.
Elastic; falls.
Inelastic; rises.
Inelastic; falls. 0% 30

15. If demand is elastic and a firm cuts its price, total revenue will rise.
True
False 0% 30

16. 1%; rise 9% 1% fall 9% 10%; not change 10%; fall 10%
If the price elasticity of demand for gasoline is 0.1, a 10% increase in the price of gasoline will cause the amount of gasoline sold to fall by _____ an d the total revenue from gasoline sales to _____.
1%; rise 9%
1% fall 9%
10%; not change
10%; fall 10% 0% 30

17. Rise; elastic. Fall; elastic. Rise; inelastic. Fall; inelastic.
Based on the diagram below, if the price of gasoline rises from $5 to $6, total revenue would ____ because demand is _____.
$10
D for gasoline
Q in millions of gallons per day 50
Rise; elastic.
Fall; elastic.
Rise; inelastic.
Fall; inelastic. 0% 30

18. Price Elasticity of Demand
The elasticity of demand for a good depends on:
The number & closeness of substitutes
The proportion of income spent on the good
The time elapsed since a price change

19. XM and Sirius are both satellite radio providers
XM and Sirius are both satellite radio providers. If Sirius goes out of business, the demand for XM radio will become more inelastic.
True
False 0% 30

20. The average income of smokers is lower in Mexico than in the U. S
The average income of smokers is lower in Mexico than in the U.S. This should cause the demand for cigarattes to be more inelastic in the U.S. than in Mexico.
True
False 0% 30

21. More Elasticities of Demand
Cross Elasticity of Demand
measures responsiveness of demand for a good to a change in the price of another good.
exy= %D quantity demanded for x
%D change in price of y
exy > 0  substitutes
exy <0  complements

22. More Elasticities of Demand
Income Elasticity of Demand
measures how the quantity demanded of a good responds to a change in income, ceteris paribus. eI = %D in quantity demanded
% D in income
eI >0  normal good
eI >1 luxury good
eI <0 inferior good

23. Oranges and apples are likely to have
A positive cross elasticity of demand
A negative cross elasticity of demand
An income elasticity of demand greater than one. 0% 30

24. Medication for high blood pressure.
Which of the following is most likely to have a negative income elasticity of demand?
Plasma TVs
Second hand clothing.
Housing
Medication for high blood pressure. 0% 30

25. Price Elasticity of Supply
A change in demand causes
A larger change in equilibrium price if supply is supply is steeper,
A smaller change in equilibrium quantity if supply is steeper.

26. Elasticity of Supply Elasticity of supply
measures the responsiveness of the quantity supplied to a change in the price of a good when all other influences on selling plans remain the same.

27. Elasticity of Supply
The unit elastic demand curve is a good one to use to emphasize that elasticity and slope are not equal. Have the students calculate the elasticity of supply on two linear demand curves that passes through the origin, one with a slope of 0.5 and the other with a slope of 2. They’ll get the message.

28. Elasticity of Supply Factors That Influence the Elasticity of Supply
Elasticity of supply for inputs
Substitution possibilities for inputs
The time frame for supply decisions
Storage costs

29. Suppose that the City of Oxford imposes a ban on any new construction of rental housing. This would cause the supply of housing to be more elastic.
True
False. 0% 30

30. Suppose that the City of Oxford imposes a ban on any new construction of rental housing. This would cause rental prices to rise more for any given increase in the demand for housing.
True
False. 0% 30

31. Suppose that a new technology reduces the cost of storing tomatoes
Suppose that a new technology reduces the cost of storing tomatoes. This should cause the price of tomatoes to fluctuate ____ in response to changes in the demand for tomatoes because tomato supply will become more ____.
More; elastic.
More; inelastic.
Less; elastic.
Less; inelastic. 0% 30