Microeconomics: Chapter 5 Elasticity And Its Application

Front 1

What is elasticity?

Back 1

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

Front 2

What is the price elasticity of demand?

Back 2

measures how much the quantity demanded responds to a change in price

Front 3

Demand for a good is said to be elastic if:

Back 3

the quantity demanded responds substantially to changes in the price

Front 4

Demand for a good is said to be inelastic if:

Back 4

the quantity demanded responds only slightly to changes in the price

Front 5

Basically, what does the price elasticity of demand for any good measure?

Back 5

how willing consumers are to buy less of the good as its price rises

Front 6

How is the price elasticity of demand computed?

Back 6

percentage change in quantity demanded
divided by
the percentage change in price

Front 7

Goods with close substitutes tend to have more __________ demand

Back 7

elastic

Front 8

Why do goods with close substitutes tend to have more elastic demand?

Back 8

It is easier for consumers to switch from that good to others

Front 9

What is an example of substitutes?

Back 9

butter and margerine

Front 10

If the price of butter has a small increase, what happens to the quantity of butter sold?

Back 10

fall by a large amount

Front 11

What is an example of a food without a close substitute?

Back 11

eggs

Front 12

Since eggs are a food without a close substitute, the demand for eggs is less __________ than the demand for butter

Back 12

elastic

Front 13

Necessities have __________ demands

Back 13

inelastic

Front 14

Luxuries have ______________ demands

Back 14

elastic

Front 15

What does the elasticity of demand in any market depend on?

Back 15

how we draw the boundaries of the market

Front 16

What is an example of a narrowly defined market and what is an example of a broadly defined market?

Back 16

Ice cream (narrow); Food (broad)

Front 17

Narrowly defined markets tend to have more __________ demand than broadly defined markets

Back 17

elastic

Front 18

Why are narrowly defined markets more elastic than broadly defined markets?

Back 18

because it is easier to find close substitute for narrowly defined goods

Front 19

Goods tend to have more ________ demand over longer time horizons

Back 19

elastic

Front 20

The more we respond to a price change, the ________ the elasticity

Back 20

higher

Front 21

If price does not change demand much, then it is

Back 21

inelastic

Front 22

If price has a lot of effect on demand, then it is

Back 22

elastic

Front 23

Demand is considered elastic when the elasticity is _______ than 1

Back 23

greater

Front 24

Demand is considered inelastic when the elasticity is _______ than 1

Back 24

less

Front 25

If the elasticity is exactly one, then demand is said to have _______________

Back 25

unit elasticity

Front 26

The flatter the demand curve, the _____________ the price elasticity of demand

Back 26

greater

Front 27

The steeper the demand curve, the _____________ the price elasticity of demand

Back 27

smaller

Front 28

As the elasticity rises, the demand curve becomes ________

Back 28

flatter

Front 29

If a good has a large number of substitutes , the more ________ it is

Back 29

elastic

Front 30

Why is salt very inelastic? (Three reasons)

Back 30

1. there are no good substitutes
2. it is a necessity to most people
3. it represents a small proportion of most people's budget

Front 31

What is total revenue?

Back 31

the amount paid by buyers and received by sellers of a good

Front 32

How is total revenue computed?

Back 32

Price of the good times the quantity sold

Front 33

If the demand curve is inelastic, how does total revenue change as one moves along the demand curve?

Back 33

increase in price leads to a decrease in quantity demanded that is proportionally smaller, so total revenue increases

Front 34

If the demand curve is elastic, how does total revenue change as one moves along the demand curve?

Back 34

increase in price leads to a decrease in quantity demanded that is proportionally larger, so total revenue decreases

Front 35

When demand is inelastic, price and total revenue move in the ____________ direction(s)

Back 35

same

Front 36

When demand is elastic, price and total revenue move in ____________ direction(s)

Back 36

opposite

Front 37

When demand is unit elastic, total revenue is ________ when the price changes

Back 37

constant

Front 38

What does income elasticity of demand measure?

Back 38

how the quantity demanded changes as consumer income changes

Front 39

How is the income elasticity of demand measured?

Back 39

percentage change in quantity demanded
divided by
percentage change in income

Front 40

If a good is a normal good and income increases, the quantity demanded _________

Back 40

increases

Front 41

If a good is an inferior good and income increases, the quantity demanded ____________

Back 41

decreases

Front 42

Inferior goods have __________ income elasticities

Back 42

negative

Front 43

Why do inferior goods have negative income elasticities?

Back 43

quantity demanded and income move in opposite directions

Front 44

Necessities, such as good and clothing, tend to have __________ income elasticities

Back 44

small

Front 45

Why do necessities, such as food and clothing, tend to have small income elasticities?

Back 45

consumers choose to buy some of these goods even when their income is low

Front 46

Luxuries, such as caviar and diamonds, tend to have ___________ income elasticities

Back 46

large

Front 47

Why do luxuries, such as caviar and diamonds, tend to have large income elasticities?

Back 47

consumers feel that they can do without these goods altogether if their income is low

Front 48

What does the cross-price elasticity of demand measure?

Back 48

how the quantity demanded of one good responds to change in the price of another good

Front 49

How is the cross-price elasticity of demand measured?

Back 49

percentage change in quantity demanded of good 1 divided by
percentage change in the price of good 2

Front 50

Whether the cross-price elasticity is a positive or negative number depends on whether the two goods are ____________ or ____________

Back 50

substitues or complements

Front 51

What is a substitute?

Back 51

goods that are used in place of one another

Front 52

What is an example of a substitute?

Back 52

hamburgers and hotdogs

Front 53

Because the price of hot dogs and the quantity of hamburgers demanded move in the same direction, the cross-price elasticity is ___________.

Back 53

positive

Front 54

What is a complement?

Back 54

goods that are typically used together

Front 55

What is an example of a complement?

Back 55

computers and software

Front 56

An increase in the price of computer reduces the quantity of software demanded the cross-price elasticity is ___________

Back 56

negative

Front 57

If the cross-price elasticity of demand is greater than one, then the two goods are _____________

Back 57

substitutes

Front 58

If the cross-price elasticity of demand is less than one, then the two goods are _____________

Back 58

complements

Front 59

If the cross-price elasticity of demand is equal to zero, then the two goods are _____________

Back 59

independent (no relation to each other)

Front 60

What does the Law of Supply state?

Back 60

higher prices raise the quantity supplied
lower prices lower the quantity supplied

Front 61

What does the Price Elasticity of Supply measure?

Back 61

how much the quantity supplied responds to changes in the price

Front 62

Supply for a good is said to be elastic if:

Back 62

the quantity supplied responds substantially to changes in the price

Front 63

Supply for a good is said to be inelastic if:

Back 63

the quantity supplied responds only slightly to changes in the price

Front 64

What does the Price Elasticity of Supply depend on?

Back 64

the flexibility of sellers to change the amount of the good they produce

Front 65

Beachfront land has an ________ supply

Back 65

inelastic

Front 66

Why does beachfront land have an inelastic supply?

Back 66

it is almost impossible to produce more of it

Front 67

Manufactured goods, such as books, cars, and televisions, have __________ supply

Back 67

elastic

Front 68

Why do manufactured goods, such as books, cars, and televisions, have elastic supply?

Back 68

because firms that produce them can run their factories longer in response to a higher price

Front 69

Supply is usually more ___________ in the long run than in the short tun

Back 69

elastic

Front 70

Why is supply less elastic in the short run for firms?

Back 70

because firms cannot easily change the size of the their factories to make more or less of a good

Front 71

In the short run, the quantity supplied is very responsive to the price

TRUE or FALSE

Back 71

False; In the short run, the quantity supplied is not very responsive to the price

Front 72

Why is supply more elastic in the long term for firms?

Back 72

because firms can build new factories or close old ones

Front 73

In the long run, the quantity supplied can respond substantially to price changes

TRUE or FALSE

Back 73

True

Front 74

How do you compute the Price Elasticity of Supply?

Back 74

Percentage change in quantity supplied
divided by
Percentage change in price

Front 75

What does the Price Elasticity of Supply measure?

Back 75

the responsiveness of quantity supplied to the price

Front 76

When elasticity equals zero, supply is _________ and the supply curve is __________.

Back 76

perfectly inelastic; vertical

Front 77

As elasticity rises, the supply curve gets ___________

Back 77

flatter

Front 78

"As the elasticity rises, the supply curve gets flatter" What does this show?

Back 78

that the quantity supplied responds more to changes in the price

Front 79

When elasticity is approaching infinity, supply is _________ and the supply curve is ___________

Back 79

perfectly elastic; horizontal

Front 80

"As the price elasticity of supply approaches infinity and the supply curve becomes horizontal" What does this mean?

Back 80

Very small changes in the price lead to very large changes in the quantity supplied

Front 81

Because firms often have a maximum capacity for production, the elasticity of supply may be very ________ at _________ levels of quantity supplied and very ________ at __________ levels of quantity supplied

Back 81

high; low; low; high

Front 82

Another term for "factors of production" is

Back 82

inputs

Front 83

In competitive markets, firms produce

Back 83

identical products

Front 84

An increase in the number of college scholarships issued by private foundations would

Back 84

increase demand for education

Front 85

A normal good is characterized by a __________ income elastcity

Back 85

positive

Front 86

An inferior good is characterized by a __________ income elastcity

Back 86

negative

Front 87

Why are necessities more inelastic?

Back 87

because one cannot do without a necessity, an increase in the price has little impact on the quantity demanded

Front 88

How do you find the Price Elasticity of Demand, using the midpoint method?

Back 88

(Q2 −Q1 )/[(Q2 +Q1 )/2]
-------------------------------
(P −P)/[(P +P)/2]

Front 89

If the price elasticity of demand is greater than one, demand is

Back 89

elastic

Front 90

If the price elasticity of demand is less than one, demand is

Back 90

inelastic

Front 91

An easy way to remember the difference between the terms elastic and inelastic is to substitute the word _____________ for elasticity

Back 91

sensativity