Competitive Dynamics and Government Review Questions
1. Define Demand Elasticity.
The responsiveness of a product’s quantity demanded in a change in price.
2. Explain the difference between elastic and inelastic demand in regards to how the Quantity demanded for a
product will change with a similar price increase.
If a product’s demand elasticity is elastic, then a certain percentage change in price causes a larger percentage
decrease in Quantity Demanded. Ex, 10% increase in price causes a larger than a 10% decrease in Quantity
Demanded.
If a product’ demand elasticity is inelastic, and then a certain percentage change in price causes a smaller
percentage decrease in Quantity Demanded. Ex. 10% increase in price causes less than a 10% decrease in
Quantity Demanded.
3. What is the formula to determine Total Revenue? Total Revenue = Price * Quantity Demanded.
4. If Total Revenue increases after a price increase, is the product elastic, inelastic or unit elastic? inelastic
5. If Total Revenue decreases after a price increase, is the product elastic, inelastic or unit elastic? elastic
6. If Total Revenue remains the same after a price increase, is the product elastic, inelastic or unit elastic? Unit
elastic.
7. List the factors that affect price elasticity of demand.
a. Portion of consumer income
b. Access to substitute
c. Necessities vs. Luxuries
d. Time ( demand tends to become more elastic over time)
8. If a product’s price takes up a large portion of a consumer’s incomes, would the product most likely be elastic,
inelastic, or unit elastic? Elastic
9. If there are lots of substitutes for product A and the price of product A increases, what would happen to the
total revenue for this product? Total revenue would fall. Elastic demand.
10. Over time, does a product become more demand elastic, unit elastic or inelastic? Elastic
11. Are small purchases more demand elastic, unit elastic, or inelastic than large purchases? Tend to be more
inelastic. Less responsive to price changes.
12. Write the formula to calculate Price Elasticity of Demand.
Ed[(Quantiy2 – Quantity1)/(Quanity2+Quantity1)/2 ] / [ Price2 – Price1) / (Price2 + Price1)/2]
13.
14.
15.
16.
If a product has a Price Elasticity of Demand of 2, would it be elastic, unit elastic, or inelastic? Elastic
If a product has a Price Elasticity of Demand of 1, would it be elastic, unit elastic or inelastic? Unit elastic
If a product has a Price Elasticity of Demand of .35, would it be elastic, unit elastic or inelastic? inelastic
Define Supply Elasticity.
The responsiveness of a product’s quantity supplied to a change in price.
17. Explain the difference between elastic and inelastic supply in regards to how the Quantity supplied for a product
will change with a similar price increase.
If a product’s supply elasticity is elastic, then a percentage change in price will cause a larger percentage
increase in Quantity supplied.
If a product’s supply elasticity is inelastic, then a percentage change in price will cause a smaller percentage
increase in Quantity supplied.
18. What is the main factor that affects Price Elasticity of Supply? Time
19. Why is supply perfectly inelastic in the Immediate Run? Producers are unable to increase supply in the
immediate run.
20. Explain constant-cost industry. Not a major user of any resource. By increasing supply, the cost of the resources
does not change.
21. Explain increasing-cost industry. It is a major user of at least one resource. By increasing supply, the cost of at
least one resource increases leading to an increase in production cost for the producer.
22. Explain why a short run increase in price in an increasing-cost industry will lead to a higher price in the long run
than the original price.
By increasing supply, the cost of at least one resource increases leading to an increase in production cost for the
producer.
23. Write the formula for calculating the Price Elasticity of Supply.
Es[(Quantiy2 – Quantity1)/(Quanity2+Quantity1)/2 ] / [ Price2 – Price1) / (Price2 + Price1)/2]
24. Explain what an excise tax is. A tax on a particular product expressed as a dollar amount per unit of quantity.
25. What usually happens to the equilibrium price after an excise tax is imposed? The equilibrium price increases.
26. Explain price floor. The minimum price that can be charged for a product.
27. Explain price ceiling. The maximum price that can be charged for a product.
28. Complete the worksheet on Price floor and ceiling.
Equilibrium price = $10
Equilibrium quantity = 40
A price floor is commonly used in agricultural price supports. Sets a minimum price for a product.
Quantity supplied = 52
Quantity demanded = 28
Surplus = 24
A price ceiling is commonly used in rental properties.(apartments) sets a maximum price that can be charged.
Quantity supplied = 20
Quantity demanded = 58
Shortage of 38
29. You have decided to rent a booth at the local Farmer’s Market for the summer to sell baked goods. The first day
you sell your baked goods for $2.00 each and sell 50 items.
What is your total revenue for the first day? $100
The second day you decide to raise the price of each item to $3.00 and you sell 40 baked goods.
What is your total revenue for the second day? $120
Compute the Price Elasticity of Demand using the formula you wrote for question 12.
Ed=[(40 – 50)/ (90)/2 ] / [ $3 – $2) / ($5)/2]
= [-10/45] / [$1/ $2.50]
= .-2222 / .40
= -.555
Are the baked goods elastic, unit elastic, or inelastic? Inelastic.
30. Compute the Price Elasticity of Supply when the price of strawberries increases from $1.50 to $2.00 per kg and
Quantity Supplied changes from 5 million kg to 9 million kg.
Es=[(9 - 5)/(9+5)/2 ] / [$2.00 - $1.50) / ($2.00+$1.50)/2]
= [4/7] /[$0.50/$1.75]
= .571/.286
= 2.00