Elasticity Review IB Economics 1. Explain the meaning of price elasticity of demand. 2. Why do we say that it measures responsiveness of quantity along a given demand curve? 3, Why do we treat PED as if it were positive, even though it is usually negative? 4, Itis observed that when the price of headphones is $16 per pair, 100 pairs of headphones are sold; when the price falls to $12 per pait, 120 pairs of headphones are sold, Calculate the price elasticity of demand. 5. A 10% increase in the price of a particular good gives rise to an 7% decrease in quantity bought. What is the price elasticity of demand? 6. Specify the value for each of the following PEDs and show, using diagrams, the shape of the demand curve that corresponds to each one: a. perfectly elastic demand b. unit elastic demand c. perfectly inelastic demand 7. Provide examples of goods likely to have demand that is a. elastic b. inelastic. 8. Which price elasticity of demand values (or range of values) occur most often in the real world? rice (P) st a ee quantty () 9. Using the graph above, ‘a calculate PED when price increases from $10 to $15, b. calculate PED when price increases from $25 to $30 ¢, calculate PED when price increases from $40 to $45 d. state what general principle about values of the PED along the straight-line demand curve your calculations show. 10. What can you say about the difference between PED and the slope of a straight-line demand curve? 14, Identify and explain the determinants of the price elasticity of demand.12, Compare the elasticity of demand in each of the following p: explanation for your answer: ‘a. chocolate or Cadbury's chocolate b. a notepad or a computer c. apple juice or orange juice d. water (for your home) in one week or water in one year e. alcohol or iPhones of goods, and given an 13. Explain and show, using diagrams, how total revenue will change if: a. price increases and demand is elastic b. price decreases and demand is inelastic. ©. price increases and demand is perfectly inelastic d. price increases and demand is inelastic ©. price decreases and demand has unit elasticity f. price decreases and demand is elastic. 14. How can a firm's knowledge of price elasticity of demand for its product help it in its pricing decisions? 15, Suppose a hurricane destroys a substantial portion of this year’s crop. Using diagrams, explain what is likely to happen to farmers’ revenues, assuming the demand for the product they produce is inelastic. 16. Why do many primary commodities have a relatively low PED while many manufactured products have a relatively high PED? 17. Use the concept of PED and diagrams to explain why agricultural product prices tend to fluctuate more compared with manufactured product prices over the short term. 18. The government would like to tax certain products to raise government revenue. Using diagrams, explain how price elasticity of demand can help it decide which products it should tax. 19, Explain the meaning of cross-price elasticity of demand, 20. Why do we say it involves a shifting demand curve? 21, What can you conclude about the relationship of goods A and B in the following situations? ‘a. sales of good A increase by 10% in response to a price decrease in good B of 15% b. sales of good B decrease by 10% in response to a price decrease in good A of 15% «, sales of good B remain unchanged in response to a price decrease in good A of 15% 22, Suggest examples of pairs of goods that would correspond with the situations described in a, b, and c above, 23. If XED between Coke and Pepsi is 0.7, how will the demand for Coke change if the price of Pepsi increases by 5%? (Your answer should be in percentage terms, and should indicate whether the demand for Coke will increase or decrease.) 24, For the answer to question 23, use diagrams to show the following given a 5% increase in the price of Pepsi a. the change in quantity demanded of Pepsi b. the change in demand for Coke26, Suppose goods A and B have a XED of 0.2 and goods B and C have a XED of 0.8. ‘a. Whats the relationship between the two goods in each pair? b. What can you conclude about the strength of this relationship for each pair? c. Draw a diagram to show what happens to the demand for good B when the prices of A and C increase, 26. How can knowledge of cross-price elasticities of demand help firms make pricing decisions in the case of a. substitutes b. complements 27. Explain the meaning of income elasticity of demand. 28. Why do we say it involves a shifting demand curve? 29. Explain the difference between normal and inferior goods and provide examples of each. 30. Your income increases from $2000 a month to $2400 a month. As a result, you inorease your pizza consumption from & pizzas to 12 pizzas per month and you decrease your purchases of cheese sandwiches from 15 to 10 per month. a. Calculate your income elasticity of demand for pizzas and for cheese sandwiches. b. What kinds of goods are pizzas and cheese sandwiches? . Show using diagrams the effects of your increase in income on your demand for pizzas and cheese sandwiches 31. A 15% increase in income leads to a 10% increase in the demand for good A and a 20% increase in demand for good B. a. Explain which of the two goods is income elastic and which is income inelastic. b. Which of the two goods is likely to be a necessity good and which a luxury good? 32. How can you account for the fact that income elasticity of demand for food has been estimated to be about 0.15 to 0.2 in more developed countries and about 0.8 in less developed countries? 33. What is one likely explanation behind the observed rapid growth in certain service industries, including health care, education and financial services, compared with other industries such as food (in the primary sector) and furniture (in the secondary sector)? 34. Use the concept of YED and a diagram to explain why agricultural product prices tend to fall relative to prices of manufactured products over the long term. 35. Explain the meaning of price elasticity of supply. 36. Why do we say it measures responsiveness of quantity along a given supply curve? 37. Specify the value or range of values for each of the following PESs, and show using diagrams the shape of the supply curve that corresponds to each one’ a. perfectly elastic supply b. unit elastic supply ©. perfectly inelastic supply 38. Which price elasticity of supply values (or range of values) do we see most often in the real world? 39. Compare the three types of supply curves above on a single diagram.40. Identify and explain the determinants of PES. 41. For each of the following situations, calculate the PES given a price increase of $10 to $15 per unit a. does not respond at all during the first week b. increases from 10,000 units to 12,000 units over five months ©. increases from 10,000 units to 18,000 units over two years 42, How can you account for the difference in the size of the three elasticities in the question above? 43. Draw a supply curve that is likely to correspond to each of the three elasticities in a single diagram. 44, Complete the following table for a summary of elasticity concepts. ("suse FORMULA VALUES DESCRIPTION Price elasticity - of demand I | Cross-price elasticity of demand Income elasticity | of demand Price elasticity : of supply