Unit 5: Elasticity and Its Applications
How much buyers and sellers actually budge when a price moves — the number behind whether a tax collects revenue or kills a market.
4 topics · 14 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.
Price Elasticity of Demand
- How it worksHow does the percentage change in quantity demanded divided by the percentage change in price measure elasticity?
- Worked exampleFind the price elasticity of demand when a 10 percent price increase drops quantity demanded by 20 percent.
- Common mistakeWhy isn't the slope of a demand curve the same thing as its elasticity?
- Going furtherWhat happens to a good's measured elasticity if you calculate it with the midpoint method instead of the simple percentage method?
Your turn1 of 2
Find the price elasticity of demand when a 12 percent price increase drops quantity demanded by 22 percent.What Makes a Good's Demand Elastic or Inelastic
- How it worksHow do the number of substitutes, necessity versus luxury, and time all push a good's elasticity up or down?
- Going furtherWhat happens to a good's measured elasticity when you widen the definition from Coca-Cola to soft drinks to beverages?
- Ties togetherHow does the time horizon for elasticity connect to the long-run versus short-run supply curves later in the course?
Your turn1 of 2
Insulin has very few substitutes and is a necessity, while a specific brand of soft drink has many close substitutes and is a discretionary purchase. Which good's demand is more elastic?Elasticity and Total Revenue
- How it worksHow does total revenue rise or fall depending on whether demand is elastic or inelastic at the current price?
- Worked exampleFind whether a firm's revenue rises or falls if it cuts price by 5 percent and quantity sold rises by 15 percent.
- Common mistakeWhy doesn't raising the price always raise a seller's total revenue?
- Going furtherWhat happens to total revenue along a straight-line demand curve as you slide from the top to the bottom?
Your turn1 of 2
Find whether a firm's revenue rises or falls if it cuts price by 8 percent and quantity sold rises by 19 percent. What is the approximate percent change in total revenue?Price Elasticity of Supply, Income Elasticity, and Cross-Price Elasticity
- How it worksHow does the ease of ramping up production over time make supply more elastic in the long run than the short run?
- Worked exampleFind the cross-price elasticity of demand for tea if a 10 percent rise in the price of coffee raises tea demand by 5 percent.
- Common mistakeWhy doesn't a negative income elasticity mean a good is somehow defective rather than just inferior?
Your turn1 of 2
Find the cross-price elasticity of demand for tea if a 12 percent rise in the price of coffee raises tea demand by 7 percent.