Microeconomics, Mcconnell, 18Ed., Chapter 6

Front 1

Price Elasticity of Demand

Back 1

The ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price; a measure of the sensitivity of buyers to a change in the price of a product or resource.

Percentage change
in quantity demanded of product X
Ed = ----------------------------------------------------------------
Percentage change in price of product X

Front 2

Elastic Demand

Back 2

A demand for a product or resource whose price elasticity is greater than 1. (consumers are sensitive to price increases and may not purchase).

Front 3

Inelastic Demand

Back 3

A demand for a product or resource whose price elasticity is less than 1. (consumers are not sensitive to price increases and will probably purchase anyway).

Front 4

Consumer responsiveness is measured in _______ change, not ______ change.

Back 4

percentage, absolute

Front 5

Unit Elasticity

Back 5

Where the price-elasticity coefficient is equal to 1. (The percentage change in quantity demanded or supplied is equal to the percentage change in price. Revenue will stay constant).

Front 6

Perfectly Inelastic Demand

Back 6

Where a price change results in no change of quantity demanded. The price-elasticity coefficient is 0 and demand is graphed as a vertical line.

Front 7

Perfectly Elastic Demand

Back 7

Where a price change results in an infinite change (all that can be obtained) in a quantity demanded. The price-elasticity coefficient is infinite and demand is graphed as a horizontal line.

Front 8

The importance of elasticity for firms is the net effect on _____ ______.

Back 8

total revenue

Front 9

Total Revenue equals

Back 9

product price (P) times the quantity sold (Q).

TR = P x Q

Front 10

If demand is elastic, a decrease in price will ______ total revenue.

Back 10

increase

(i.e. airline tickets)

Front 11

If demand is inelastic, a decrease in price will ______ total revenue.

Back 11

reduce

(i.e. toothpaste)

Front 12

Price Elasticity of Demand is greater...

Back 12

1. the more substitute goods are available;
2. the higher the price of the product relative to the consumer's income;
3. the more the good is considered to be a luxury;
4. the longer the time period involved.

Front 13

Demand is typically elastic in the _________ _________ range of the demand curve.

Back 13

high-price, low-quantity

Front 14

Price Elasticity of Supply

Back 14

The ratio of the percentage change in quantity supplied of a product or resource to the percentage change in its price; a measure of the responsiveness of producers to a change in the price of a product or resource.

Percentage change
in quantity supplied of product X
Es = -----------------------------------------------------------
Percentage change in price of product X

Front 15

The degree of Price Elasticity of Supply depends on...

Back 15

the ease of shifting resources between alternative uses.

Front 16

Cross Elasticity of Demand

Back 16

The ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good.

Percentage change
in quantity demanded of product X
Exy = --------------------------------------------------------------
Percentage change in price of product Y

Front 17

A positive Cross Elasticity of Demand coefficient indicates the two products are _________ _______.

Back 17

substitute goods

Front 18

A negative Cross Elasticity of Demand coefficient indicates the two products are __________ ______.

Back 18

complimentary goods

Front 19

The Cross Elasticity of Demand indicates...

Back 19

how sensitive the purchase of one product is to changes in the price of another product.

Front 20

Income Elasticity of Demand

Back 20

The ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income; measures the responsiveness of consumer purchases to income changes.

Percentage change
in quantity demanded of product X
Ei = -------------------------------------------------------------
Percentage change in income

Front 21

The Income Elasticity of Demand coefficient is positive for ______ _____ and negative for ________ ______.

Back 21

normal goods, inferior goods

Front 22

Consumer Surplus

Back 22

The difference between the maximum price a consumer is willing to pay for an additional unit of a product and its market price. (The triangular area below the demand curve and above the market price).

Front 23

Producer Surplus

Back 23

The difference between the actual price a producer receives and the minimum acceptable price.
(The triangular area above the supply curve and below the market price).

Front 24

Efficiency Loss

Back 24

Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. (Also called deadweight loss).

Front 25

Underproduction creates Efficiency Losses because output is not...

Back 25

being produced for which maximum willingness to pay exceeds minimum acceptable price.

Front 26

Overproduction creates Efficiency Losses because output is...

Back 26

being produced for which minimum acceptable price exceeds maximum willingness to pay.

Front 27

Market Period

Back 27

A period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply.

Front 28

Short Run

Back 28

A period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable.

Front 29

Long Run

Back 29

A period of time long enough to enable producers of a product to change the quantities of all the resources they employ; a period in which all resources and costs are variable and no resources or costs are fixed.

Front 30

If the quantity supplied by producers is relatively sensitive to price changes, supply is _______.

Back 30

elastic

Front 31

If the quantity supplied by producers is relatively insensitive to price changes, supply is _______.

Back 31

inelastic

Front 32

Elastic =

Back 32

sensitive to price changes. (coefficient > 1)

Front 33

Inelastic =

Back 33

insensitive to price changes. (coefficient < 1)

Front 34

Regardless of the degree of elasticity or inelasticity of supply, price and _______ always move together.

Back 34

revenue

Front 35

The coefficient of Cross Elasticity of Demand can be...

Back 35

either positive or negative.

Front 36

If Cross Elasticity of Demand is positive, meaning the sales of product X move in the same direction as a change in the price of product Y, then products X and Y are ______ _____.

Back 36

substitute goods

(i.e. an increase in the price of Evian causes consumers to buy more Dasani)

Front 37

If Cross Elasticity of Demand is negative, meaning the increase in the price of one product decreases the demand in another, then the two products are _______ ______.

Back 37

complimentary goods

(i.e. a digital camera and a memory stick)

Front 38

A zero or near zero coefficient of Cross Elasticity of Demand indicates...

Back 38

that the two products are unrelated.

Front 39

For normal goods, the Income Elasticity of Demand is _______.

Back 39

possitive

Front 40

For inferior goods, the Income Elasticity of Demand is _______.

Back 40

negative

Front 41

During a recession, products with a relatively high positive Income Elasticity of Demand coefficients are...

Back 41

greatly affected.

(i.e. automobiles, housing, and restaurant meals)

Front 42

Economic Efficiency consists of _______ _______ and _______ _______.

Back 42

Productive Efficiency, Allocative Efficiency

Front 43

Productive Efficiency

Back 43

The production of a good in the least costly way.

Front 44

Allocative Efficiency

Back 44

The apportionment of resources among firms and industries to obtain the production of the products most wanted by society.