The cookies are sold in a convenience store, which has several options on the counter that customers can choose as a last-minute impulse buy. If you think that the change in price will cause many buyers to forego a cookie, then you are suggesting that the demand is elastic, or that the buyers are sensitive to price changes. If you think that the change in price will not impact sales much, then you are suggesting that the demand for cookies is inelastic, or insensitive to price changes.
Before we do any math, this assumption suggests that the demand for cookies is elastic. We immediately see that the change in demand is greater than the change in price. That means that demand is elastic. In this example, the demand for cookies is elastic. She is earning less revenue because of the price change. What should Helen do next? She has learned that a small change in price leads to a large change in demand.
If the pattern holds, then a small reduction in price will lead to a large increase in sales. That would give her a much more favorable result. Practice until you feel comfortable doing the questions. Improve this page Learn More.
Skip to main content. Module 5: Elasticity. As a result, demand and supply often but not always tend to be relatively inelastic in the short run and relatively elastic in the long run. The tax incidence depends on the relative price elasticity of supply and demand.
When supply is more elastic than demand, buyers bear most of the tax burden, and when demand is more elastic than supply, producers bear most of the cost of the tax. Tax revenue is larger the more inelastic the demand and supply are. If the policy goal is to expand employment for low-skilled workers, is it better to focus on policy tools to shift the supply of unskilled labor or on tools to shift the demand for unskilled labor?
What if the policy goal is to raise wages for this group? Explain your answers with supply and demand diagrams. Skip to content Chapter 5. Learning Objectives By the end of this section, you will be able to:. Analyze how price elasticities impact revenue Evaluate how elasticity can cause shifts in demand and supply Predict how the long-run and short-run impacts of elasticity affect equilibrium Explain how the elasticity of demand and supply determine the incidence of a tax on buyers and sellers.
How do coffee prices fluctuate? Under what conditions can carmakers pass almost all of this cost along to car buyers? Under what conditions can carmakers pass very little of this cost along to car buyers? Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug.
What if the elasticity were 0. What if it were 1? Explain your answer. Review Questions If demand is elastic, will shifts in supply have a larger effect on equilibrium quantity or on price? If demand is inelastic, will shifts in supply have a larger effect on equilibrium price or on quantity?
If supply is elastic, will shifts in demand have a larger effect on equilibrium quantity or on price? If supply is inelastic, will shifts in demand have a larger effect on equilibrium price or on quantity? Would you usually expect elasticity of demand or supply to be higher in the short run or in the long run? Under which circumstances does the tax burden fall entirely on consumers? Critical Thinking Questions Would you expect supply to play a more significant role in determining the price of a basic necessity like food or a luxury like perfume?
Hint : Think about how the price elasticity of demand will differ between necessities and luxuries. A city has built a bridge over a river and it decides to charge a toll to everyone who crosses. For one year, the city charges a variety of different tolls and records information on how many drivers cross the bridge. The city thus gathers information about elasticity of demand.
If the city wishes to raise as much revenue as possible from the tolls, where will the city decide to charge a toll: in the inelastic portion of the demand curve, the elastic portion of the demand curve, or the unit elastic portion? In a market where the supply curve is perfectly inelastic, how does an excise tax affect the price paid by consumers and the quantity bought and sold?
Glossary tax incidence manner in which the tax burden is divided between buyers and sellers. Solutions Answers to Self-Check Questions Carmakers can pass this cost along to consumers if the demand for these cars is inelastic. If the demand for these cars is elastic, then the manufacturer must pay for the equipment. If the elasticity is 1. If the elasticity were 0. Increases in price will offset the decrease in number of units sold, but increase your total revenue. If elasticity is 1, the total revenue is already maximized, and you would advise that the company maintain its current price level.
Previous: 5. Next: 5. Share This Book Share on Twitter. Use the mid-point formula in your calculation. Which of the following statements about the relationship between the price elasticity of demand and revenue is TRUE? Suppose BC Ferries is considering an increase in ferry fares. If doing so results in an increase in revenues raised, which of the following could be the value of the own-price elasticity of demand for ferry rides? Use the demand diagram below to answer this question. Which of the following statements correctly describes own-price elasticity of demand, for this particular demand curve?
Demand is unit elastic for all prices. Which of the following could be the absolute value for the own-price elasticity of demand, in the price range considered? Skip to content Topic 4 Part 1: Elasticity. Learning Objectives By the end of this section, you will be able to: Analyze graphs in order to classify elasticity as constant unitary, infinite, or zero Describe the price effect and the quantity effect Analyze how price elasticities impact revenue and expenditure.
Glossary Elastic when the elasticity is greater than one, indicating that a 1 percent increase in price will result in a more than 1 percent increase in quantity; this indicates a high responsiveness to price. Inelastic when the elasticity is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in quantity; this indicates a low responsiveness to price.
And it looks like things didn't change much. And now, let's go-- let's just do one more point actually for the sake of time. Point E. And I encourage you to try other ones. Try F on your own. My quantity is 16 burgers per hour. I sell a total of 32 burgers. Now actually, let's just do the last one, F, just to feel a sense of completion.
I sell 18 burgers per hour. And once again, that's the area of this rectangle, this short and fat rectangle right over here. And E was the area-- the total revenue in E was the area of that right over there. And you could graph these just to get a sense of how total revenue actually changes with respect to price or quantity.
Lets plot the total revenue with respect to quantity. So let's try it out. So if you-- let me plot it out. So this is going to be total revenue. And this axis right over here is going to be quantity. And we're going to, once again, go from-- let's see. This is 0. This is 5.
This is And this is 20 right over here. And then total revenue. Let's see, it gets as high-- it gets pretty close to So let's go. This is 10 20, 30, 40, and So that's 50, 40, 30, 20, and So when our quantity is 2, and our price is 9. Well, we don't have price on this axis right over here. But when our quantity is 2, our total revenues So it's going to be something like there. Then, when our quantity is 4, our total revenue is Right about there.
Then, when our quantity is 9, our total revenue is almost So right over there. And then, when it's 11, it's also at that same point right over there.
And then, when we are quantity is 16, our total revenues So Right there. And then finally, when our quantity is 18, our total revenue is And what you see is that it's plotting out a curve that looks like this.
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