Elasticity
inferior good
An increase in the price of CocaCola causes buyers to want to buy more Pepsi.
Draw a diagram for the BOTH the Pepsi and Coca Cola market to illustrate this scenario and explain why the markets for each product will change.
QD dec for Coke after P inc, Whole D curve shifts right for Pepsi leading to inc in P and Q consumed for Pepsi
These products are considered substitutes so this is one of the Dem shifting determinants (non P)
Which of the following would cause the supply of good X to become more elastic?
a. Greater availability of substitutes for good X
b. Increased prices of inputs required to produce good X
c. The ability to easily reallocate inputs to production of good X
d. A short time frame for making production decisions.
c. The ability to easily reallocate inputs to production of good X
Draw a diagram illustrating the impact of being able to import Maple syrup from Canada to Hong Kong at a price that is lower than Hong's domestic market price.
Indicate how access to a lower World Price impacts the CS and PS and DWL.
Label the change in Q consumed vs. Q produced in Hong Kong.
In which of the following cases would government intervention in a market result in an increase in quantity sold?
a. Setting a price ceiling above the equilibrium price
b. Setting a price ceiling below the equilibrium price
c. Setting a price floor above the equilibrium price
d. Providing producers of a product with a per unit subsidy
d. Providing producers of a product with a per unit subsidy
What does it mean if 2 products have a XED of +0.3?
The products are substitutes but they aren't that closely related substitutes.
1. Explain the law of supply and demonstrate it on a diagram for a market of your choice.
2. Give an example of a non-P determinant of Supply. Draw what would happen if there was a change in one of these determinants on your diagram
There is a direct relationship between P and QS. As P increases QS increases because firms want to make more revenue. They earn more revenue per Good or Service sold if the P increases, so they will want to inc the QS as P increases.
A change in a determinant of S will lead to a shift of the S curve and a change in the Supply WITHOUT a change in P.
If the P of a good increases from $10 to $20, and the QS changes from 50 to 60 as a result, what is the elasticity of Supply?
Is this inelastic, unit elastic, or elastic and what does this mean in real terms
The PES is inelastic because the percentage change in P is greater than the percentage change in QS.
Suppose the small country of Bakersville imports 40,000 kg of bananas. The global price of bananas is $0.50 per kg. The government of Bakersville collects tariff revenues of $4000 from imports.
What price do consumers in Bakersville now pay for bananas?
They now pay $0.60 per kg of bananas.
Tax = tariff x amt imports
4000 = tariff x 40000
4000/40000 = $.10
$.10 plus global price = $0.60
Draw a subsidy diagram for a product.
Indicate and explain the impact of such an intervention in terms of P, Q, Gov Spending and DWL
Also indicate the changes in PS and CS
Draw on board
A 10 percent increase in the price of a good results in a 4 percent increase in total revenue. From this information, it can be concluded that the demand over this range of prices
a. is upward sloping
b. is inelastic
c. has a price elasticitiy of demand equal to 2.5
d. has increased by 14%
b. is inelastic
list and explain 3 reasons for the law of demand.
As P increases QD decreases
Income Effect: As the price of a product goes up, it takes up a greater proportion of one's income. Therefore, they will buy less of it.
Substitution Effect: If the price of a product goes up, consumers may switch to a cheaper alternative, thus consuming less of the initial product.
Diminishing Marginal Utility: As consumers consume more of a G or S, they will get less enjoyment for it and will consume less of it, unless the price drop incentivizes them to keep consuming.
Suppose the PES for gasoline in the short run is estimated to be 0.4. Due to an unexpected surge in the demand for gasoline, the price of gasoline increases by 20 percent. As a result, how much will the QS change? Will it increase or decrease?
Show your work
It will increase by 8 percent.
%Change QS/%Change in P = 0.4
% Change QS/20 = 0.4
0.4 x 20 = 8
QS will increase by 8%
Which stakeholders benefit from global trade?
Which stakeholders do not benefit as much from global trade
Consumers, Producers who import factors of production
Domestic producers who can't compete with the lower global price.
After the government imposed a $.20 per gallon tax on gasoline, the price of a gallon of gas increased from $1.00 to $1.15. Who bears most of the tax burden?
How do you know?
Consumers because the total tax per gallon is $.20 and the p consumers have to pay increased by $.15. This is 2/3 of the tax.
A firm estimates that the absolute value of the PED for its signature sandwich is 2. If the firm increases its sandwich price by 10% what will happen to QD?
Calculate the change in QD and show your work.
PED = %change QD/% change P
%changeQD/10 = 2
%change QD = 2x10 = 20%
The QD will DECREASE by 20%
t will decrease by 20%
The following is the QS and QD of oranges at various prices.
1. Draw a diagram of the market for oranges
2. What is the market equilibrium P and Q?
2. Calculate the Consumer and Producer Surplus at PE.
P. Orange S. Orange D
$0 0 20
$5 5 15
$10 10 10
$15 15 5
$20 20 0
CS is $50 and PS is $50
Can't post image here
At the current prices of goods X and Y, the QD of good X is 10 units. and the QD of good Y is 5 units. The XED between goods X and Y is 0.6. A 10% increase in the price of good Y will result in what change in QD?
Show your work
A 6 percent increase in QD of good X
XED = %change in QDX/% change P of good Y
0.6 = %change QDX/10
0.6 x 10 = 6
Draw a diagram demonstrating the market for blueberries in Hong Kong.
Indicate that the World price for blueberries is lower than the domestic price.
Show the impact of a quota on the P, Q, CS, PS, and DWL on the blueberry market.
Show on board
Assume that the market for a good has an equilibrium price of $20 and quantity sold of 100 units.
After the government imposes a $5 per unit excise tax on the good, the price that consumers pay for the good increases by $3.
Draw and calculate the government tax revenue, new consumer price and Q sold, and the DWL.
I'll show on board.
Tax revenue is 300 DWL is 100
How does the elasticity of demand change ALONG a D curve, moving from high prices to lower prices?
The PED decreases when moving from high to low prices along a D curve.
Draw a diagram that indicates a maket PE and QE.
Show what would happen in this market if the P was increased and explain what this is called.
Demonstrate the impact on Economic surplus and explain what that means.
Show DWL
This would lead to a market surplus.
QS will inc due to law of supply and profit motive but QD will decrease due to law of demand.
Resources will be wasted producing goods that will not be sold and people lose the benefit of when they were able to access the product for a price that was less than they were willing and able to pay
Draw on board
Why would governments choose to tax a product with INelastic PED?
Because they will earn more revenue since consumers will still buy the product, even at a higher price.
Draw a diagram illustrating a tariff with labels for:
Global Trade: PE, QE, CS, PS
After Tariff: Pt, Qt, Gov Rev, CS, PS, DWL
See board
You need to draw 2 diagrams.
1. Draw a diagram for a product that has a price ceiling placed on it. What kind of product might this be? What is the purpose of such a move by the gov? How does it impact the market (P, QS, QD, CS, PS)
2. Draw a diagram for a product that has a price floor. What kind of product might the government do this for? What is the purpose of such a move? How does it impact the market (P, QS, QD, CS, PS)
Draw and explain on board