ECO 2315 Exam 2 - Showalter
Terms in this set (66)
The formula for the price elasticity of demand is
the percentage change in quantity demanded divided by the percentage change in price
Why isn't elasticity just measured by the slope of the demand curve?
the measurement of slope is sensitive to the units chosen for quantity and price
If a 11% increase in the price of Cheerios causes a 24 percent reduction in the number of boxes of cereal demanded, the price elasticity of demand for cheerios is _____. The demand for cheerios is ______.
Suppose the price elasticity of demand for cereal is -1.19. If so, then the demand for cereal is ________.
Assume the price elasticity of demand for a particular magazine is -0.56. The demand for the magazine is:
The price elasticity of demand is measured as
the percentage change in the quantity demanded divided by the percentage change in price.
If a 20% increase in the price of Red Bull energy drinks results in a decrease in the quantity demanded of 25%, demand for Red Bull is
The key determinants of the price elasticity of demand for a product are:
availability of close substitutes, passage of time, necessities versus luxuries, definition of the market, and share of the good in the consumer's budget
Which determinant is the most important?
The availability of close substitutes is the most important determinant
The price elasticity of demand in the United States for crude oil has been estimated to be -0.061 in the short run -0.453 in the long run. The demand for crude oil
is more price elastic in the long run than in the short run because in the long run a substitute for crude oil may be found
Compare the demand for pepper with demand for gasoline. The demand for pepper is likely
more inelastic because pepper tends to represent a smaller fraction of a consumer's budget
The demand for milk is likely to be more inelastic than the demand for concert tickets becasue
milk is more of a necessity
Compare the demand for water with the demand for wine. The demand for win is likely
relatively more elastic because wine is a luxury
Consider the demand for cigarettes. Suppose the government increases the price of cigarettes by raising cigarette taxes. How will this affect the demand for cigarettes over time? If the price of cigarettes increases, then the quantity of cigarettes demand will
decrease, and this effect will likely become larger (in absolute value) over time
The price of organic apples rises and apple growers find that their revenue decreases. Is the demand for organic apples elastic or inelastic?
The demand for organic apples is
A sportswriter about the Cleveland Indians baseball team made the following observation: "If the Indians suddenly slashed all tickets to $10, would their attendance actually increase? Not all that much and revenue would drop dramatically." The sports writer is assuming that the demand for Indians tickets is
relatively price inelastic
As you move up a linear demand curve, the price elasticity of demand in absolute value
On the lower part of a linear demand curve below the midpoint, the demand is _________ and raising the price causes total revenue to _______.
The cross-price elasticity of demand is
the percentage change in quantity demanded of one good divided by the percentage change in the prive of another good
If the cross-price elasticity of demand is negative, then the products are:
complements, but if it is positive, then the products are substitutes
For a normal good, the income elasticity of demand will be:
positive, but for an inferior good, the income elasticity of demand will be negative
Is it possible to tell from the income elasticity of demand whether a product is a luxury good or a necessity?
Yes. If the income elasticity of demand is greater than 1, then the good is a luxury. If the income elasticity of demand is positive but less than 1, then the good is a necessity.
Suppose the price of pepper increases by 25 percent and, as a result, the quantity of salt demanded (holding the price of salt constant) decreases by 7 percent. The cross-price elasticity of demand between pepper and salt is _____.
In this example, pepper and salt are ______________. Instead, suppose pepper and salt were substitutes. If so, then the cross-price elasticity of demand between pepper and salt would be:
-.28; complements; positive
Consumer surplus is
the difference between the highest price a consumer is willing to pay and the price the consumer actually pays
How does consumer surplus change as the equilibrium price of a good rises or falls?
As the price of a good rises, consumer surplus decreases, and as the price of a good falls, consumer surplus increases.
________________ surplus is the difference between the highest price a consumer is willing to pay and the price the consumer actually pays.
A price ceiling is a legally determined _________________ price that sellers may charge.
A price floor is a legally determined ____________________________ price that sellers may receive
_________________ surplus is the difference between the lower price a firm would be willing to accept and the price it actually receives.
Economic Efficiency is:
a market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a a maximum.
Why do some consumers tend to favor price controls while others tend to oppose them?
price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.
Do producers tend to favor price floors or price ceilings? Why?
Producers favor price floors because, when binding, price floors increase price above the equilibrium and may increase producer surplus
Discussions of the economic results of rent control and of federal farm programs would be considered __________________ analysis, and discussions of whether rent control and the farm programs are good or bad policies would be considered _____________ analysis.
Look at question #4 on Quiz3 and #15 on Quiz4
What is the definition of producer surplus?
the difference between the lower price a firm would have been willing to accept and the price it actually receives
Does it matter whether buyers or sellers are legally responsible for paying a tax?
No, the market price to consumers and net proceeds to sellers are the same independent of who pays the tax.
According to economists, an efficient tax is one that
imposes a small dead weight loss relative to the tax revenue it raises.
Price Elasticity of Demand
measures the responsiveness of Quantity Demanded to change in price, ceteris paribus
concerned with movements along the D curve
e = 1
unit elastic demand
e > 1
e < 1
e = 0
perfectly inelastic demand
Determinants of Elasticity
1) number of substitutes available ( # subs increase, elasticity increases)
2) luxury/necessities (high elasticity/low elasticity)
3) product definition (demand for Nike is more elastic than demand for all running shoes because there are more subs for NIKE shoes)
5) Importance in Budget (as a product takes up a greater percentage in our budget, elasticity increases
Price X Quantity
Elasticity and Total Revenue Rules
1) If D is elastic, then P and TR move in opposite directions
2) If D is inelastic, then P and TR move in same direction (steep demand curve)
3) If D is unit elastic, then a change in P will have no effect on TR
Price increases, Total Revenue increases
price does not matter as much
Price increases, Total Revenues decreases
Suppose we wish to increas sales by 20%, and elasticity = 3.5. What % change in price is necessary to do this?
drop price by 5.7%
Price Elasticity of Supply
Time: as time increases, firms can react better to price increases by Quantity Supply increase, so elasticity of supply increases
Flexibility of Inputs: as flexibility increases, elasticity of supply increases
Income Elasticity of Demand
elasticity of income = % change quantity demanded/ % change of income
elasticity of income < 0 (negative)
goods that consumer demand decreases, when consumer income increases
elasticity > 0 (positive)
0-1 = necessity goods
1 < = luxury goods
goods that consumer demand increases when income increases
Cross Price Elasticity of Demand
cross price elasticity = % change in quantity demanded A/ % change price B
e = negative = complements
e = 0 = not related
e = positive = substitutes
analysis of gains from trade (wealth) between buyers and sellers in a market
welfare = wealth = surplus
occurs when all gains (surplus) from trade are realized
1) surplus is maximized
2) marginal benefit
marginal cost for the last unit
dead weight loss of surplus
the loss of surplus from inefficient outcome compared to efficient outcome
fairness in distribution
income, property, payroll, state, sales, gas (excise), imports
burden increases as income increases
burden decreases as income increases
burden increases as income increases
Buyer Tax Effect
demand shifts left or demand shifts vertically down by amount of tax
Seller Tax Effect
supply shifts left or supply shift vertically upward by amount of tax
1) taxes deceives a "wedge" between what the buyer pays and the seller receives
2) it doesn't matter who physically pays the tax; the sames split of the tax burden occurs whether the buyers or sellers pay
3) the tax burden falls most heavily on the side of the market with the fewest alternatives (least elastic curve)
Taxes and Efficiency
- taxes create deadweight loss (excess burden on a tax)
- however, if taxes are needed to fund a government-provided product or service, then the 'efficient tax' is a tax that creates the lowest DWL compared to the revenue generated
Luxury Tax Goal
reallocation from rich to poor
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