Chapter 6/Demand and Elasticity
CHAPTER 6
DEMAND AND ELASTICITY
TEST YOURSELF
1. What variables other than price and advertising are likely to affect the quantity
demanded of a product?
The answer depends upon the product, but general variables include tastes, prestige value
2.Describe the probable shifts in the demand curves for
a. Airplane trips when airlines’ on-time performance improves
b. Automobiles when airplane fares double
c. Automobiles when gasoline prices double
d. Electricity when the average temperature in the United States rises during a
particular year (Note: The demand curve for electricity in Maine and the demand
curve for electricity in Florida should respond in different ways. Why?)
(a) Increase: shift to the right. Airplane trips are more attractive when their punctuality
improves.
3.Taxes on particular goods discourage their consumption. Economists say that such taxes
“distort consumer demands.” In terms of the elasticity of demand or elasticity of supply
for the commodities in question, what sort of goods would you choose to tax to achieve
the following objectives?
a. Collect a large amount of tax revenue
b. Distort demand as little as possible
c. Discourage consumption of harmful commodities
d. Discourage production of polluting commodities
(a) Goods with low price elasticity of demand (inelastic demand).
4.Give examples of commodities whose demand you would expect to be elastic and
commodities whose demand you would expect to be inelastic.
Elastic: Any particular food, like carrots or pork chops (since there are close substitutes),
apartments in a particular building (since they require a lot of a consumer’s budget, and
Chapter 6/Demand and Elasticity
since there are close substitutes), vacation trips to the Caribbean (since they are not really
needed, and since there are close substitutes).
5.A rise in the price of a certain commodity from $20 to $25 reduces quantity demanded
from 25,000 to 10,000 units. Calculate the price elasticity of demand.
Using the formula in the text, (change in quantity/change in price) times (price/quantity),
6.If the price elasticity of demand for gasoline is 0.3 and the current price is $3.20 per
gallon, what rise in the price of gasoline will reduce its consumption by 10 percent?
The elasticity is the percentage change in quantity divided by the percentage change in
price and is equal to 0.3. Since the desired percentage change is quantity is 10%, the
7.Which of the following product pairs would you expect to be substitutes, and which
would you expect to be complements?
a. Shoes and sneakers
b. Gasoline and sport-utility vehicles
c. Bread and butter
d. Compact discs and digital music files
Complements: (b) and (c)
8.For each of the product pairs given in Test Yourself Question 7, what would you guess
about the products’ cross elasticity of demand?
a. Do you expect it to be positive or negative?
b. Do you expect it to be a large or small number? Why?
Shoes and sneakers: The cross elasticity is positive because they are substitutes, but likely
to be rather low because the two are normally used on quite different occasions for very
different purposes.
Gas and sport utility vehicles: The cross elasticity is negative because they are
Chapter 6/Demand and Elasticity
DISCUSSION QUESTIONS
1. Explain why elasticity of demand is measured in percentages.
Elasticity is calculated in percentages so that it can be a measure of responsiveness that is
0.01. If, instead, steel is measured in pounds, the value is 4000/200 = 20. No one could
say which is the true measure of elasticity. If the changes in both quantity and price are
2. Explain why the elasticity of demand formula normally eliminates minus signs.
In the calculation of the price elasticity of demand, the sign of the percentage price
3. Explain why the elasticity of a straight-line demand curve varies from one part of the
curve to another.
Along a straight-line demand curve, the same absolute price reduction (say, $1) is always
associated with the same absolute quantity increase (say, 2 pounds). When price is high
4. A rise in the price of a product whose demand is elastic will reduce the total revenue of
the firm. Explain.
Revenue is equal to price times quantity. When the demand curve is elastic, the
percentage decline in quantity exceeds the percentage rise in price, and therefore the
5. Name some events that will cause a demand curve to shift.
6. Explain why the following statement is true: “A firm with a demand curve that is
inelastic at its current output level can always increase its profits by raising its price
and selling less.” (Hint: Refer back to “Price Elasticity of Demand: Its Effect on Total
Revenue and Total Expenditure.”
If the demand curve is inelastic, the percentage decline in quantity will be less than the