question
What is the basic formula for the price elasticity of demand coefficient?
answer
% change in QD / % change in price
question
What does a price floor mean?
answer
the government is imposing a minimum legal price that is typically above the equilibrium price
question
The demand for a product is inelastic with respect to price if?
answer
consumers are largely unresponsive to per unit price change
question
Perfectly inelastic demand schedule?
answer
can be represented by a line parallel to the vertical axis
question
PED of a straight-line demand curve is?
answer
elastic in high price ranges & inelastic in on low price ranges
question
What do price ceilings and floors do?
answer
interfere w/the rationing function of prices
question
PED coefficient measures?
answer
buyer responsiveness to price changes
question
What are black markets associated w/?
answer
price ceilings and the resulting product shortages
question
If an effective price ceiling is placed on burgers then?
answer
the QD will exceed the QS, a black market for burgers may evolve, & consumers may want gov. to ration burger
question
an effective price floor will?
answer
result in a product surplus
question
for a linear demand curve?
answer
demand is elastic at high prices
question
the concept of PED measures?
answer
the sensitivity of consumer purchases to price changes
question
when will total revenue increase?
answer
when price rises & demand is inelastic
question
If the university chamber music society decides to raise ticket prices to provide more funds to finance concerts, the society is assuming that the demand for tickets is?
answer
inelastic
question
demands for products like salt, bread, & electricity tend to be?
answer
relatively price inelastic
question
the elasticity of demand for a product is likely to be greater?
answer
the greater the amount of time over which buyers adjust to price change
question
the demand for coca cola?
answer
more elastic than the demand for soft drinks in general
question
the demand for autos?
answer
of the same elasticity as the demand for honda accords?
question
the demand for a luxury good whose purchase would exhaust a significant portion of one's income is
answer
relatively elastic
question
the PES measures?
answer
how responsive the QS of X is to changes in the price of X
question
the demand for a necessity whose cost is a small component of one's total income is ?
answer
relatively inelastic
question
PES?
answer
greater in the long run than in the short run
question
if the supply of a product is inelastic, the PES coefficient is?
answer
less than 1
question
the price of old baseball cards rises rapidly w/increases in demand b/c?
answer
the supply of old baseball cards is inelastic
question
the supply curve of a one-of-a-kind original painting is?
answer
perfectly inelastic
question
if the YED (income elasticity of demand) for lard is -3.00 this means that?
answer
lard is an inferior good
question
the formula for XED (cross price elasticity of demand) is?
answer
QD of X / % change in price of Y
question
XED measures ?
answer
how sensitive purchases of a specific product are to changes in the price of some other product
question
the larges the positive XED coefficient btwn the products X & Y, the?
answer
greater their substitutability
question
we would expect the XED btwn dress shirts & ties to be?
answer
negative, indicating complementary goods
question
what is consumer surplus?
answer
the difference btwn the max prices consumers are willing to pay for a product and the lower equilibrium price
question
what is producer surplus?
answer
the difference btwn the minimum prices producers are willing to accept for a product and the higher the equilibrium price?
question
Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. What does Jennifer experience? Nathan?
answer
jennifer = a consumer surplus of $9
nathan = producer surplus of $3
nathan = producer surplus of $3
question
graphically, consumer surplus is measured as the triangle....
answer
under the demand curve and above the actual price
question
graphically, producer surplus is measured as the triangle....
answer
above the supply curve and below the actual price
question
what is an efficiency (dead weight) loss ?
answer
is measured as the combined loss of consumer and producer surplus
question
equation for consumer surplus & producer surplus?
answer
CS = 1/2 (b)(h)
PS = 1/2 (b)(h)
PS = 1/2 (b)(h)
question
what happens when the gov. sets prices to be 'fair'?
answer
price ceilings and price floors
question
price ceilings have to be ______________ equilibrium to make a difference
answer
below
question
price ceilings indicate a ?
answer
shortage & possible black markets
question
price floors indicate a ?
answer
surplus
question
consumer surplus + producer surplus = ?
answer
community surplus
question
elastic demand?
answer
> 1 ; relatively responsive to price changes
question
inelastic demand?
answer
< 1 ; relatively NOT responsive to price changes
question
unit elastic?
answer
= 1 (same) equal responsiveness
question
perfectly inelastic
answer
= 0
question
what determines a good/service PED?
answer
"SPLAT"
1). # of substitutes
2). proportion of income
3). luxury or necessity
4). addictive?
5). time
1). # of substitutes
2). proportion of income
3). luxury or necessity
4). addictive?
5). time
question
the more horizontal a demand curve is.......
answer
the more responsive it is to price change
question
steep (vertical) demand curve?
answer
inelastic good
question
horizontal demand curve?
answer
elastic good
question
elasticity's use by businesses?
answer
if the good is elastic, lowering the price may lead to profitable increases in QD.
if the good is inelastic, raising the price may lead to profitable decreases in QD which will still pay off.
if the good is inelastic, raising the price may lead to profitable decreases in QD which will still pay off.
question
XED = sign matters
answer
pos. = substitues
neg. = complements
pos. & > 1 = strong substitutes
pos. & < 1 = weak substitutes
neg. & < -1 = strong complements
neg. & > -1 = weak complements
neg. = complements
pos. & > 1 = strong substitutes
pos. & < 1 = weak substitutes
neg. & < -1 = strong complements
neg. & > -1 = weak complements
question
YED = sign matters
answer
take absolute value : pos. = normal goods & neg. = inferior goods
>1 = elastic
<1 = inelastic
>1 = elastic
<1 = inelastic
question
PES (wil always be positive)
answer
has 4 determinants = time, mobility of resources, ability to store stocks, and 'is there excess capacity?'
question
time (PES)
answer
ex) corn farmer
market = as it's happening this minute
short run = freezing land & capital; can't expand tools and equipment
long run = can expand anything, expand land and machinery
market = as it's happening this minute
short run = freezing land & capital; can't expand tools and equipment
long run = can expand anything, expand land and machinery
question
mobility of resources (PES)
answer
can you switch your resources to make something else or make more of something?
question
ability of store stocks (PES)
answer
ex) milk or shoes
is this something you can store overtime? Are things perishable?
if price goes up, can you make more or store more?
can make a product (shoes), store them till producers know price will go up.
is this something you can store overtime? Are things perishable?
if price goes up, can you make more or store more?
can make a product (shoes), store them till producers know price will go up.
question
is there excess capacity? (PES)
answer
do you have a part of your factory/machinery (excess capacity) not being used?
make more supply quickly by using excess capacity
make more supply quickly by using excess capacity
question
if the demand for a product X is inelastic, a 4% increase in the price of X will?
answer
decrease the quantity of X by less than 4%
ex)
.6 = Q/4
Q = -2.4%
(decrease b/c the negative, & -2.4 < 4 )
ex)
.6 = Q/4
Q = -2.4%
(decrease b/c the negative, & -2.4 < 4 )
question
Suppose Alyanna's pizzeria currently faces a linear demand curve and is charging a very high price per pizza and doing very little business. Alanna now decides to lower pizza prices by 5% per week for an indefinite period of time. We can expect that each successive week...
answer
demand will become price elastic
question
if the PED for a product is 2.5, then a price cut from $2.00 to $1.80 will....
answer
increase the QD by about 25%
2.5 = x/(1.80-2.00)/2.00
x = .25
x = 25%
2.5 = x/(1.80-2.00)/2.00
x = .25
x = 25%
question
if the demand for bacon is relatively elastic, a 10% decline in the price of bacon will...
answer
increase the amount demanded by more than 10%
ex)
2 = Q/10
Q = 20%
ex)
2 = Q/10
Q = 20%
question
suppose we find that the PED for a product is 3.5 when its price is increased by 2%. We can conclude that QD....
answer
decreased by 7 %
3.5 = x/2
x = 7%
3.5 = x/2
x = 7%
question
when price increases QD....
when price decreases QD...
when price decreases QD...
answer
decreases
increases
increases
question
the PED for beef is about .60. Other things equal, this means that a 20% increases in the price of beef will cause the QD of beef to...
answer
decrease by approximately 12%
.60 = x/20%
x = 12%
.60 = x/20%
x = 12%
question
Suppose that the price of local cable increased from $16.20 to $19.80 and as a result the # of cable subscribers decreased from 224,000 to 176,000. Along this portion of the demand curve, PED is?
answer
(176,000 - 224,000) / 224,000
-------------------------------- = -.96 = .96
(19.80 - 16.20) / 16.20
-------------------------------- = -.96 = .96
(19.80 - 16.20) / 16.20
question
if the price of hand calculators falls from $10 to $9 and as a result, the QD increases from 100 to 125, then..
answer
demand is elastic
(125-100)/ 100
--------------- = -2.5 = 2.5
(9-10) / 10
(125-100)/ 100
--------------- = -2.5 = 2.5
(9-10) / 10
question
GSU raises tuition for the purpose of increasing its revenue so that more faculty can be hired. GSU is assuming the the demand for education there is...
answer
relatively inelastic
question
the supply of a product X is elastic if the price of X rises by?
answer
5% and QS rises by 7%
PES = 7/5
PES = 7/5
question
Assume that the price of product X rises by 5% and the QS of X increases by 15%. The coefficient of PES for good X is?
answer
more than 1 = supply is elastic
PES = 15/5
PES = 15/5
question
suppose that when your income increases from $28,000 to $30,000 per year, your purchase of X increase from 4 to 5 units b/c of that income increase. thus....
answer
the demand for X is elastic w/respect to income
YED = (5-4)/4
------------ = 3.5
(30,000-28,000)
YED = (5-4)/4
------------ = 3.5
(30,000-28,000)
question
suppose that a 20% increase in the price of normal good Y causes a 20% increase in the QD of normal good X. The coefficient of XED is ?
answer
positive & therefore these goods are substitutes
XED = 20%/20% = 1
XED = 20%/20% = 1
question
if positive & > 1
if positive & < 1
if negative & < -1
if negative & > -1
if positive & < 1
if negative & < -1
if negative & > -1
answer
strong substitutes
weak substitutes
strong complements
weak complements
weak substitutes
strong complements
weak complements
question
suppose that a 20% increase in the price of normal good Y causes a 10% decline in the QD of normal good X. what is the coefficient for XED?
answer
negative, & therefore these goods are complements
XED = -10%/20%
XED = -10%/20%
question
assume that a 4% increase in income in the economy produces an 8% increase in the QD of good X. YED coefficient is?
answer
positive & therefore is a normal good
YED = 8%/4%
YED = 8%/4%
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