1. Determinants of the price elasticity of demand Consider some determinants of the price elasticity of demand: I The availability of close substitutes I Whether the good is a necessity or a luxury - How broadly you dene the market - The time horizon being considered Elastic, Inelastic A good without any close substitutes is likely to have relatively V demand, since consumers cannot easily switch to a substitute good if the price of the good rises. A good's price elasticity of demand depends in part on how necessary it is relative to other goods. If the following goods are priced approximately the same, which one has the most elastic demand? 0 Diamond necklace O A heart valve for heart attack victims The price elasticity of demand for a good also depends on how you dene the good. Organize the goods found in the following table by indicating which is likely to have the most elastic demand, which is likely to have the least elastic demand, and which will have demand that fails in between. Categories Most Elastic In Between Least Elastic Red bell peppers 0 O 0 Vegetables 0 O 0 Food 0 O O more The price elasticity of demand is also affected by the given time hori no more, nor less, Other things being equal, the demand for natural gas will tend to be V elastic in the short run than in the long run. 2. Using the midpoint method The following graph shows two known points (X and Y) on a demand curve for apples. ('3) PRICE (Dollars per pound) 0102030405060708090100 QUANTITY (Thousands of pounds of apples) elastic, inelastic n According to the midpoint metho the price elasticity of demand for apples between point X and point Y is approximately V , which suggests that the demand for apples is V between points X and Y. 3. Elastic, inelastic, and unit-elastic demand The following graph shows the demand for a good. g E _L___..|.x I I I I I I I Demand 21 27 42 QUANTITY (Units) For each of the regions iisted in the following table, use the midpoint method to identify if the demand for this good is eiastic, (approximately) unit eiastic, or inelastic. Region Elastic Inelastic Unit Elastic Between Y and Z 0 (Q C) Between X and Y O 0 Between W and X 0 O True or False: 111e value of the price elasticity of demand is equal to the slope of the demand curve. True, false 4. The variety of demand curves The following graph displays four demand curves (LL, MM, MN, and 00) that intersect at point A. E c :1 '- in as E E T: 9. LI.I 2 CE D. ED 3!] 100 12!] 140 160 180 200 QUANTITY (Units) Using the graph, complete the table that follows by indicating whether each statement is true or false. Statement True False Curve MM is less elastic between painls A and C than curve MN is between points A and D. 0 Between points A and C, curve MM is inelastic. 0 Between points A and B, curve LL is perfectly inelastic. 0 5. Elasticity and total revenue The following graph shows the daily demand curve for bikes in San Francisco. Use the green rectangle (triangle symbols) to compute total revenue at various prices along the demand curve. Note: You will not be graded on any changes made to this graph. (?) 300 275 250 Total Revenue 225 200 175 150 PRICE (Dollars per bike) A 125 100 75 50 25 Demand 0 3 6 9 12 15 18 21 24 27 30 3 36 QUANTITY (Bikes)On the following graph, use the green point (triangle symbol) to pint the annual total revenue when the market price is $50, $75, $100, $125, $150, $1 75, and $200 per bike. 3180 * 2940 Total Revenue 2700 2460 E | 1980 1740 TOTAL REVENUE (Dollars) 1500 1260 1020 4llllllllllll o 25 50 75 100 125 150 175 200 225 250 275 30:: PRICE (Dollars per bike) According to the midpoint method, the price elasticity of demand between points A and B is approximately 0.6 V . Suppose the price of bikes is currently $125 per bike, shown as point A on the initial graph. Because the demand between points A and B is inelastic v , a $25-perbike decrease in price will lead to a decrease v in total revenue per day. elastic, Unit Elastic An increase, No change In general, in order for a price increase to cause an increase in total revenue, demand must be inelastic v . 7. Substitutes, complements, or unrelated? You work for a marketing rm that has just landed a contract with Run-oftheMills to help them promote three of their products: guppy gummies, raskels, and mookies. All of these products have been on the market for some time, but, to entice better sales, Run-of-the-Mills wants to try a new advertisement that will market two of the producls that consumers will likely consume together. As a former economics student, you know that complements are typically consumed together while substitutes can take the place of other goods. Run-ofthe-Mills provides your marketing firm with the following data: When the price of guppy gummies decreases by 20%, the quantity of raskels sold decreases by 22% and the quantity of mookies sold increases by 7%. Yourjob is to use the cross-price elasticity between guppy gummies and the other goods to determine which goods your marketing firm should advertise together. Complete the rst column of the following table by computing the cross-price elasticity between guppy gummies and raskels, and then between guppy gummies and mookies. In the second column, determine if guppy gummies are a complement to or a substitute for each of the goods listed. Finally, complete the final column by indicating which good you should recommend marketing with guppy gummies. Relative to Guppy Gummies Cross-Price Elasticity of Demand Complement or Substitute Recommend Marketing with Guppy Gummies Itaskels v L yes, no E Rookies V V yes 'no 8. The variety of supply curves The following graph displays four supply curves (HH, II, JJ, and KK) that intersect at point A. (? 400 360 K 320 280 B D 240 A 200 H H PRICE (Dollars per unit) 160 120 80 K 40 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Units) Using the graph, complete the table that follows by indicating whether each statement is true or false. Statement True False Curve JJ is less elastic between points A and D than curve KK is between points A and C. O O Between points A and B, curve II is perfectly elastic. O O Between points A and D, curve JJ is elastic. O O9. Application: Demand elasticity and agriculture Consider the market for corn. The following graph shows the weekly demand for corn and the weekly supply of corn. Suppose a spell of unusually good weather occurs, which enables corn producers to generate more corn per acre of land. Show the effect this shock has on the market for corn by shifting the demand curve, supply curve, or both. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. ? 20 O Supply Demand 16 O 12 Supply PRICE (Dollars per bushel) CO Demand 10 20 30 40 50 QUANTITY (Millions of bushels) One of the growers is concerned about the price decrease caused by the spell of good weather because she feels it will lower revenue in this market. As an economics student, you can use elasticities to determine whether this change in price will lead to an increase or decrease in total revenue in this market. elastic, inelastic, Unit elastic Using the midpoint method, the price elasticity of demand for corn between the prices of $10 and $8 per bushel is , which means demand is elastic between these two points. Therefore, you would tell the grower that her claim is _correct se total revenue will increase > as a result of the spell of good weather. in 0.41 decrease correct 0.82 1.22 1.64 Confirm your previous conclusion by calculating total revenue in the corn market before and after the spell of good r. Enter these values in the following table. Before Spell of Good Weather After Spell of Good Weather Total Revenue (Millions of Dollars)