Author Question: What does the price elasticity of demand show? In the market for sweaters, suppose Green's price ... (Read 181 times)

mspears3 · **on:** Jun 29, 2018

What does the price elasticity of demand show?

In the market for sweaters, suppose Green's price elasticity of demand is 0.2, Smith's price elasticity is 1.2, and the price elasticity of all the other consumers is greater than 0.2 but less than 1.2 . Could the market price elasticity be less than 0.2 or greater than 1.2?

Question 2

How does the time frame over which a supply decision is made influence the elasticity of supply? Explain your answer.

What will be an ideal response?

emily12345 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The price elasticity of demand measures the percentage change in quantity demanded of a good due to a percentage change in its price. The market price elasticity cannot be less than 0.2 . If price falls by one percent, Green will buy 0.2 percent more sweaters and the increase in everybody else's consumption will be greater than 0.2 percent (since their price elasticities are all greater than 0.2). Since total demand will rise by more than 0.2 percent, the market price elasticity must be greater than 0.2 . A similar argument would show that the market price elasticity must be less than 1.2 .

Answer to Question 2

The momentary supply, short-run supply, and long-run supply all illustrate the response of suppliers to changes in the price, but they differ according to how much time has elapsed after the price change.
The momentary supply is frequently the least elastic and shows how suppliers cannot easily respond to a price change immediately after the price change occurs. Changing the quantity produced means changing the inputs into the production process, which takes time to complete. Sometimes the momentary supply is perfectly inelastic.
The short-run supply shows suppliers' response after enough time has elapsed for some, but not all, of the possible technological adjustments have occurred. Short-run supply generally is intermediate in elasticity between the momentary supply and the long-run supply.
The long-run supply shows how suppliers react after enough time has passed that all possible adjustments to factors of production have been made to accommodate the price change. It usually is the most elastic of the three supplies.