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25 Cards in this Set
- Front
- Back
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A demand curve is elastic when |
an increase in price reduces the quantity demanded a lot |
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When the same increase in price reduces quantity demanded just a little, thenthe demand curve is |
Inelastic |
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Price elasticity of demand |
the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign) |
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% change in quantity demanded = |
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% change in price = |
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Price elasticity of demand = |
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Midpoint method |
technique for calculating the percent change. In this approach, we calculate changes in avariable compared with the average, or midpoint, of the starting and finalvalues |
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Midpoint method formula |
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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 |
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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 |
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Demand is elastic if |
the price elasticity of demand is greater than 1 |
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Demand is inelastic if |
the price elasticity of demand is less than 1 |
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Demand is unit-elastic if |
the price elasticity of demand is exactly 1 |
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Total revenue = |
Price x Quantity Sold |
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A price effect: |
after a price increase, each unit sold sells at a higher price, which tends to raiserevenue |
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A quantity effect: |
after a price increase, fewer units are sold, which tends to lower revenue |
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What factors determine the price elasticity of demand? |
- the availability of close substitutes - whether the good is a necessity or luxury - share of income - time elapsed since the price change |
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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 |
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TheCross-Price Elasticity of Demand between Goods A and B = |
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Goods are substitutes when |
the cross-price elasticity of demand is positive |
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Goods are complements when |
the cross-price elasticity of demand is negative |
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The income elasticity of demand |
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 |
normal good (the quantity demanded at any given price increases as income increases) |
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When the income elasticity of demand is negative, the good is an |
inferior good (the quantity demanded at any given price decreases as income increases) |
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The price elasticity of supply |
a measure of the responsiveness of the quantity of a good supplied to the priceof that good |
