Table of contents

0. Basic Principles of Economics1h 5m
1. Reading and Understanding Graphs59m
2. Introductory Economic Models1h 10m
3. The Market Forces of Supply and Demand2h 26m
4. Elasticity2h 26m
5. Consumer and Producer Surplus; Price Ceilings and Floors3h 45m
6. Introduction to Taxes and Subsidies1h 46m
7. Externalities1h 12m
8. The Types of Goods1h 13m
9. International Trade1h 16m
10. The Costs of Production2h 35m
11. Perfect Competition2h 23m
12. Monopoly2h 13m
13. Monopolistic Competition1h 9m
14. Oligopoly1h 26m
15. Markets for the Factors of Production1h 26m
16. Income Inequality and Poverty35m
17. Asymmetric Information, Voting, and Public Choice39m
18. Consumer Choice and Behavioral Economics1h 16m

4. Elasticity

Price Elasticity of Supply

Microeconomics

4. Elasticity

Price Elasticity of Supply

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Multiple Choice

If a one percent decrease in the price of a pound of pound cake causes a three percent decrease in the quantity of pound cake supplied:

Demand is inelastic

Demand is elastic

Supply is inelastic

Supply is elastic

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Verified step by step guidance

Understand the concept of elasticity: Elasticity measures how much the quantity supplied or demanded responds to changes in price. In this case, we are dealing with price elasticity of supply.

Identify the given information: A 1% decrease in price leads to a 3% decrease in the quantity supplied. This indicates how sensitive the supply is to price changes.

Calculate the price elasticity of supply using the formula: \( E_s = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}} \). Substitute the given values into the formula.

Interpret the elasticity value: If the absolute value of the elasticity is greater than 1, supply is considered elastic. This means the quantity supplied is highly responsive to price changes.

Conclude based on the elasticity value: Since the calculated elasticity is greater than 1, the supply of pound cake is elastic, meaning suppliers significantly reduce the quantity supplied when the price decreases.