Deck 6: Describing Supply and Demand: Elasticities

Question 1

Under which of the following two scenarios would demand for hot dogs be more elastic? Explain.
(a) You are at a baseball game at Wrigley Field and want to eat a hot dog.
(b) It's Tuesday, you are planning the menu for a picnic you are going to have on Saturday and you decide to serve hot dogs.

Answer 1

Demand for hot dogs will be more elastic in scenario (b) because you have much more time to shop around for hot dogs. At the game if you want a hot dog, you've got to pay the price. The general lesson is the more time you have to shop the more elastic the demand.

Question 2

Under which of the following two scenarios would demand be more elastic? Explain.
(a) Demand for blood pressure medicine by those with high blood pressure.
(b) Demand for chemical-free hair coloring.

Answer 2

Demand will be more elastic in the second case. There are several alternatives to the purchase of Clairol hair coloring but if one has high blood pressure one needs to take his/her medicine. The general lesson is the less the good is a necessity the more elastic is its demand curve.

Question 3

Both the slope of the demand curve and the elasticity of demand are measures of how consumers alter their quantities demanded in response to changes in price. How are the two concepts different from each other? Given a negatively sloped straight-line demand curve, how will slope and elasticity differ? Given a vertical or horizontal demand curve, how will they differ?

Answer 3

The slope of the demand curve relates absolute changes in price and quantity demanded. Elasticity is a ratio of percentage changes. Whereas the slope of the demand curve will depend on the units in which price and quantity are measured, elasticity is a pure number and is independent of the units in which price and quantity are measured.
If the demand curve is a straight line, its slope is constant. However, the elasticity of demand along a negatively sloped straight-line demand curve changes at every point. It increases as we move up on the demand curve (higher prices and lower quantities), and decreases as we move down (lower prices and higher quantities).
Finally in measuring slope, the change in price is in the numerator and the change in quantity is in the denominator. In the case of elasticity, the percentage change in quantity is in the numerator and the percentage change in price is in the denominator. Hence, if the demand curve is vertical (slope equals infinity), the elasticity of demand is zero (perfectly inelastic). If the demand curve is horizontal (slope equals zero), the elasticity of demand is infinite (perfectly elastic).

Question 4

Define the price elasticity of supply.

Question 5

What is the income elasticity of demand? How can it be used to determine whether a good is a normal good or an inferior good? What is the cross-price elasticity of demand? How can it be used to determine whether two goods are substitutes or complements?

Question 6

Define the price elasticity of demand and the price elasticity of supply. What is the difference between elastic and inelastic demand?

Question 7

You started a pajama business four years ago and it is now becoming quite successful. You are thinking of hiring an economic consultant to help you rise to the next level in your industry. One consultant is familiar with the concept of elasticity; one is not. Which one would you hire? Explain your reasoning.

Question 8

Are the elasticities of demand and supply the same as the slopes of demand and supply curves? Explain.

Question 9

Why is substitution the key factor in determining how elastic or inelastic a demand curve will be? Under what conditions will demand be more elastic?

Question 10

What will happen to total revenue of a firm if it raises its price and its demand is elastic (or inelastic)?

Question 11

What happens to total revenue if a firm raises its price and its demand is elastic?

Question 12

Under which of the following two scenarios would demand be more elastic? Explain.
(a) Demand for a new car.
(b) Demand for a tank of gas for your current car.

Question 13

Under which of the following two scenarios would demand be more elastic? Explain.
(a) Demand for a camera.
(b) Demand for a 35 mm SLR camera with auto rewind, advance, zoom, and flash.

Question 14

How can the income elasticity of demand be used to determine whether a good is a normal good or an inferior good?

Question 15

Five brief scenarios are presented below. Apply the correct elasticity term to each scenario and explain your answer.
(a) John must have an appendectomy. Upon arriving at the hospital he is told that for this week only they are doing abdominal operations at half price. Even in the face of a 50 percent price cut, John insists that he wants only one operation.
(b) Apple announces that it is willing to sell as many model 3000 computers as are ordered at a fixed price of $500 per unit.
(c) Northwest Airlines increased all its fares by 25 percent. As a result the number of passengers declined by 25 percent and the total revenue of Northwest Airlines remained the same.
(d) Newsweek magazine raised its price to annual subscribers by 50 percent. As a result annual subscriptions fell by 30 percent. Although it lost some readership, Newsweek significantly increased its revenues.
(e) The price of soybeans went up by 60 percent. In response farmers planted more soybeans and output increase by 70 percent.

Question 16

What is the income elasticity of demand?

Question 17

What is the difference between elastic and inelastic demand and supply?

Question 18

What is the key factor in determining how elastic or inelastic a demand curve will be? Explain.

Question 19

Define the price elasticity of demand.

Question 20

What happens to total revenue if a firm lowers its price and its demand is inelastic?

Question 21

Consider the following three diagrams: (a) Which of the diagrams above demonstrates a unit elastic supply curve? How can you tell?
(b) Which of the diagrams above demonstrates an inelastic supply curve? How can you tell?

Question 22

Demonstrate graphically and explain verbally the impact on price and quantity when supply decreases and demand is highly elastic.

Question 23

How can the cross-price elasticity be used to determine whether two goods are complements or substitutes?

Question 24

Suppose that the price elasticity of demand is 6. If price rises by 10% how much will quantity demanded fall?

Question 25

If two goods have a cross-price elasticity value of +3, are they substitutes or complements?

Question 26

Bill's Homemade Pizza recently increased the price of its super jumbo size pepperoni pizza by 12%. As a result of this price increase the quantity demanded for this type of pizza decreased by 3%. What is the price elasticity of demand for Bill's super jumbo size pepperoni pizza?

Question 27

What are complementary goods? Give an example.

Question 28

Consider the following supply curve: (a) Calculate the elasticity of supply between points A and B.
(b) Calculate the elasticity of supply between points B and C.

Question 29

Demonstrate graphically and explain verbally a perfectly elastic demand curve.

Question 30

Suppose you own two Domino's Pizza franchises in your town. After reading the latest issue of Pizza Monthly, you have concluded that both of your locations are generating below average revenue. You hire a local economics professor to conduct a pricing experiment. Here is her report:
Location 1: A 10% increase in price resulted in a 5% drop in the quantity demanded.
Location 2: A 10% increase in the price resulted in a 20% drop in the quantity demanded.
Using this information, how should you alter your pricing policy to increase your revenue at each location?

Question 31

What is the cross-price elasticity of demand?

Question 32

The elasticity of demand for fitbits is 3 and the elasticity of supply is 1.5. Suppose that a breakthrough in the technology used in the production of fitbits increased the supply of fitbits by 20%. Calculate the percentage change in the equilibrium price of fitbits.

Question 33

Consider the following demand curve: What is the price elasticity at point A? At point B?

Question 34

Suppose that the price elasticity of supply is 0.5. If price falls by 10% how much will quantity supplied fall?

Question 35

What are substitute goods? Give an example.

Question 36

Demonstrate graphically and explain verbally a perfectly inelastic demand curve.

Question 37

Demonstrate graphically and explain verbally the impact of an increase in income on the demand of a normal good.

Question 38

The elasticity of demand for sunscreen is 0.8 and the elasticity of supply is 2.2. Suppose that the demand for sunscreen increased by 10% during an unseasonably hot month. Calculate the percentage change in the equilibrium price of sunscreen.

Question 39

Consider the following demand curve: (a) Calculate the elasticity of demand between points A and B.
(b) Calculate the elasticity of demand between points B and C.

Question 40

Consider the following demand curve for Starbucks coffee. (a) Suppose the current price is $8 per cup. Using elasticity of demand, explain why Starbucks should not increase the price in order to increase total revenue.
(b) Suppose the current price is $2 per cup. Using elasticity of demand, explain why Starbucks should not lower the price in order to increase total revenue.