economics ch 5 – Flashcards
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the price elasticity of demand measures how much
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quantity demaned responds to a change in price
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demand is said to be price elastic if
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buyers respond substantially to changes in the price of a good
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demand is said to be inelastic if
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the quantity demanded changes inly slightly when the price of the good changes
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demand is elastic if the price elasticity of demand is
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greater than 1
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demand is inelastic if the price elasticity of demand is
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less than 1
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goods with many close substitutes tend to have
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more elastic demands
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for a good that is a luxury demand tends
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to be elastic
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for a good that is a necessity demand tends
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to be Inelastic
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a good will have more inelastic demand the
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broader the definition of the market
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economists compute the price elasticity of demand as the
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percentage change in quanitity demanded divided by the percentage change in price
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if the price elasticity of demand for a good is 2.0 then a 10 percent increase in price results in
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20 percent decrease in quanityty demanded
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when demand is perfectly inelastic the demand curve will be
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vertical bc buyers purchase the same amount as before whenever the price falls or rises
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demand is said to have unit elasticity if the price elasticity od demand is
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equal to 1
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when demand is elastic a decrease in price will cause
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an increase in total revenue
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when demand is inelastic an increase in price will cause an
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increase in total revenue
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when demand is unit elastic price elasticity of demand equals
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1, and total revenue does not change when price changes
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incomse elasticity of demand measures how
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the quantity demanded changes as consumer income changes
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if an increase in income results in a decrease in quantity demanded of a goos then for that good the
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income elasticity of demand is negative
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assume that a 4% increase in income results in a 2% increase in quantity remaded of a good. income elasticity of demand for the good is
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positive, and the good is a normal good
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cross price elasticity of demand measures how
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the quantity demanded of one good changes in response to a change in price of another good
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if 2 goods are substitutes their cross price elasticity will bw
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positive
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if 2 goods are complements their cross price elasticity will be
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negative
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if the quantity supplies responds only slightly to changes in price then
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supply is said to be inelastic
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Key determinant of the price elasticity of supply is the
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time horizon
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if the quantity supplies is the same regardless of price then supply is
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perfectly inelastic
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suppose that corn farmers want to increase their total revenue knowing that the demand for corn is inelastic corn farmers should
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reduce the number of acres on which they plant corn
