Econ 110: Ch. 5 - 6

Front 1

price elasticity of demand

Back 1

the ratio of the percent change in the quantity demanded to the percent change in the price as one moves along the demand curve

Front 2

The midpoint method

Back 2

replaces the usual definition of the percentage change in a variable:
%∆ X = (∆ X) ÷ (AVG value X) • 100, where average value of X is
AVG value X = (Xinitial + Xfinal) ÷ 2

Front 3

perfectly inelastic

Back 3

(a) Demand is perfectly inelastic when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line. i.e., shoelaces

Front 4

perfectly elastic

Back 4

Demand is perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line. i.e., pink tennis balls

Front 5

elastic vs. inelastic vs. unit-elastic

Back 5

Demand is elastic if the price elasticity of demand is greater than 1, inelastic if the price elasticity of demand is less than 1, and unit-elastic if the price elasticity of demand is exactly 1

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total revenue

Back 6

The total revenue is the total value of sales of a good or service. It is equal to the price multiplied by the quantity sold.

Front 7

price effect

Back 7

The price effect: after a price increase, each unit sold sells at a higher price, which tends to raise revenue;

Front 8

quantity effect

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after a price increase, fewer units are sold, which tends to lower revenue

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Factors that determine price elasticity of demand

Back 9

1) Whether close substitutes are available: price elasticity tends to be higher if there are other goods that they would be willing to consume instead, and low if there are no close substitutes
2) Whether the good is a necessity or a luxury: life-saving medicine vs. diamond rings
3) Time: The long-run price elasticity of demand is often higher than the short-run elasticity

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Cross-price elasticity of demand

Back 10

The cross-price elasticity of demand between two goods measures the effect of the change in one good’s price on the quantity demanded of the other good. It is equal to the percent change in the quantity demanded of one good divided by he percent change in the other good’s price

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When two goods are substitutes, the cross-price elasticity of demand is

Back 11

positive

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When two goods are complements, cross-price elasticity is

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negative

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Close substitutes, the cross-price elasticity is both

Back 13

positive and large

Front 14

Non-close substitutes, the cross-price elasticity is both

Back 14

positive and small

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If cross-price elasticity is only slightly below zero, they are

Back 15

weak complements

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If cross-price elasticity is very negative, they are

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strong complements

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The cross-price elasticity sign tells if the goods are

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complements or substitutes. It also eliminates the need for units in quantification

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The income elasticity of demand is

Back 18

the percent change in the quantity of a good demanded when a consumer’s income changes divided by the percent change in the consumer’s income

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When the income elasticity of demand is positive, the good is a

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normal good

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When the income elasticity of demand is negative, the good is an inferior good

Back 20

inferior good

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The demand for a good is income-elastic if

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the income elasticity of demand for that good is greater than 1.

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demand for a good is income-inelastic if

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the income elasticity of demand for that good is positive but less than 1

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The price elasticity of supply is

Back 23

a measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of the percent change in the quantity supplied to the percent change in the price as we move along the supply curve

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There is perfectly inelastic supply when

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the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied. A perfectly inelastic supply curve is a vertical line, i.e. cell phone frequencies.

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There is perfectly elastic supply when

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even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite. A perfectly elastic supply curve is a horizontal line, i.e. pizza.

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Factors that determine the Price Elasticity of Supply

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1) The Availability of Inputs: elasticity tends to be larger when inputs are easily available
2) Time: price elasticity tends to become larger as producers have more time to respond to price changes

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When an Excise Tax is Paid Mainly by Consumers, the supply/demand curves are

Back 27

i.e., gasoline: the demand curve is relatively steep, and the supply curve is relatively flat

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When an Excise Tax is Paid Mainly by Producers

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i.e., parking in small towns: the demand curve is flatter, while the supply curve is steeper

Front 29

What determines the incidence of an excise tax?

Back 29

Elasticity—not who literally pays the tax—determines the incidence of an excise tax