Elasticity improves our understanding of supply and demand by adding
a quantitive element to our analysis
Demand is said to be elastic if
buyers respond substantially to changes in the price of the good
If a person only occasionally buys a cup of coffee, his demand for coffee is probably
elastic
When quantity moves proportionately the same amount as price, demand is
unit elastic and the price elasticity of demand is 1
The supply of a good will be more elastic, the
longer the time period being considered
If an increase in the price of a good results in an increase in total revenue for the firm, then the supply of the good must be
nothing can be said about price elasticity of supply from the information given
An advance in farm technology that results in an increased market supply is
bad for farmers because total revenue will fall, but good for consumers because prices for food will fall
Price ceilings and price floors that are binding
cause surpluses and shortages to persist since price cannot adjust to the market equilibrium
If a tax is imposed on a market with elastic demand and inelastic supply
sellers will bear most of the burden of the tax
Willingness to pay
measures the value that a buyer places on a good
When the demand for a good increases and the supply of the good remains unchanged, consumer surplus
may increase, decrease, or remain unchanged
The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate
decreases, and consumer surplus decreases
Suppose that the equilibrium price in the market for widgets is $5. If a law increased the minimum legal price for widgets to $6, producer surplus
might increase or decrease
Suppose that the equilibrium price in the market for widgets is $5. If a law reduced the maximum legal price for widgets to $4
any possible increase in consumer surplus would be smaller than the loss of producer surplus
Cornflakes and milk are complementary goods. A decrease in the price of corn will
increase consumer surplus in the market for cornflakes and increase producer surplus in the market for milk