Unit 3: Elasticity
Why a higher price crushes sales of one good and barely dents sales of another, and how to put a number on that.
6 topics · 20 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
What Makes Demand Elastic or Inelastic
- How it worksHow do the number of substitutes, necessity, and time horizon decide whether demand is elastic or inelastic?
- Common mistakeWhy isn't 'elastic' just another word for 'expensive'?
- Going furtherWhat happens to the elasticity of demand for gasoline over a ten-year stretch instead of a single month?
Your turn1 of 2
A price hike of 11 percent on specialty coffee cuts quantity demanded by 28 percent. What is coffee's price elasticity of demand?Calculating Price Elasticity of Demand
- How it worksHow does the percentage change in quantity demanded divided by the percentage change in price become elasticity?
- Worked exampleFind the price elasticity of demand when price rises from 10 to 12 dollars and quantity falls from 100 to 80 units.
- Common mistakeWhy doesn't a demand curve that looks steep on a graph automatically count as the inelastic one?
Your turn1 of 2
Price rises from 11 to 16 dollars, and quantity demanded falls from 109 to 67 units. What is the price elasticity of demand, calculated as percentage change in quantity divided by percentage change in price?Elasticity and Total Revenue
- How it worksHow does the total revenue test use a price change to reveal whether demand was elastic or inelastic?
- Worked exampleFind whether total revenue rises or falls when a good's price rises from 20 to 25 dollars and quantity falls from 100 to 70 units.
- Common mistakeWhy doesn't raising the price always raise a seller's total revenue?
- Going furtherWhat happens to total revenue at the exact point where demand is unit elastic?
Your turn1 of 2
A good's price rises from 21 to 26 dollars, and quantity falls from 109 to 67 units. What is the change in total revenue, in dollars?Price Elasticity of Supply
- How it worksHow does the amount of time a producer has to adjust output change the price elasticity of supply?
- Worked exampleFind the price elasticity of supply when price rises from 10 to 15 dollars and quantity supplied rises from 100 to 120 units.
- Common mistakeWhy isn't supply always as flexible in the short run as it becomes in the long run?
Your turn1 of 2
Price rises from 11 to 17 dollars, and quantity supplied rises from 109 to 121 units. What is the price elasticity of supply?Income Elasticity of Demand
- How it worksHow does income elasticity of demand tell a normal good apart from an inferior good?
- Worked exampleFind the income elasticity of demand when income rises 10 percent and quantity demanded rises 20 percent.
- Common mistakeWhy doesn't a negative income elasticity mean a good is defective rather than just inferior?
Your turn1 of 2
Income rises by 13 percent, and quantity demanded rises by 23 percent. What is the income elasticity of demand?Cross-Price Elasticity of Demand
- How it worksHow does the sign of cross-price elasticity reveal whether two goods are substitutes or complements?
- Worked exampleFind the cross-price elasticity when a 10 percent rise in the price of coffee raises the quantity of tea demanded by 5 percent.
- Common mistakeWhy doesn't a positive cross-price elasticity mean two goods are related the same way as a complement pair?
- Ties togetherHow does a positive cross-price elasticity between coffee and tea connect to them being substitutes in the determinants of demand?
Your turn1 of 2
A 13 percent rise in the price of coffee raises the quantity of tea demanded by 8 percent. What is the cross-price elasticity of demand between tea and coffee?