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31 Cards in this Set
- Front
- Back
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price elasticity of demand |
% change in quantity demanded/% change in price |
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what does a large value for price elasticity mean |
quantity demanded changes by a lot in response to price change |
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price elastic |
when price elasticity of demand is greater than 1 |
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price inelastic |
when price elasticity of demand is smaller than 1 |
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unit price elastic |
when price of elasticity of demand =1 |
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you can calculate percent change by using the midpoint formula |
(A-B)/((A+B)/2) |
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price elasticity of demand formula |
(Q2-Q1)/((Q2+Q1)/2) / (P2-P1)/((P1+P2)/2) |
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the higher the slope the more elastic it is |
TRUE |
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what does a vertical demand curve represent |
elasticity is 0 = perfectly inelastic |
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what does a horizontal demand curve represent |
elasticity is infinite= perfectly elastic |
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what determines the price elasticity of demand |
1. availability of close substitutes: more substitutes more elastic demand 2. passage of time: elasticity is higher in the long run than in the short run 3. whether the good is a luxury or a necessity: price elasticity is high for luxuries 4. the definition of the market: the more narrowly defined market the more elastic 5. the share of a good in a consumer budget: small elasticity, small portion of your budget is not sensitive to price |
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total revenue |
the total amount of funds received by a seller of a good or service, calculated by multiplying the price per unit by the number of units sold |
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what happens to total revenue when you decrease the price of a good with inelastic demand |
total revenue goes dow |
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what happens to total revenue when you decrease the price of a good with an elastic demand |
total revenue goes up |
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special case: what occurs when the price elasticity of demand is -1. |
% change in quantity demanded= % change in price thus no change in revenue |
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as price goes up and revenue goes up |
demand is inelastic |
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as price goes up and revenue goes down |
demand is elastic |
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what do firms use to calculate price elasticity of demand for a new product |
market experiments |
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cross price elasticity of demand |
measures the strength of a substitute or complement relationships between goods |
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formula for cross price elasticity |
% change in quantity demanded of one good / % change in price of another good |
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if the products are substitutes then the cross price elasticity will be |
postive |
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if the products are complements then the price elasticity will be |
negative |
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if the product are unrelated then the price elasticity will be |
zero |
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income elasticity of demand |
measures the strength of the effect of income on quantity demanded |
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formula for income elasticity of demand |
% change in quantity demanded / % change in income |
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if income elasticity of demand is pos and greater than 1 |
normal and a luxury Ex: caviar |
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if income elasticity is pos and less than 1 |
normal and a necessity Ex: bread |
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if income elasticity is neg |
inferior Ex: ramen noodles |
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necessity |
a normal good with a quantity demanded that responds less than proportionally to a price change |
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luxury |
a normal good with a quantity demanded that responds more than proportionally to a price change |
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price elasticity pf supplied formula |
% change in quantity supplied / % change in price |
