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44 Cards in this Set
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Price Elasticity of Demand
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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 |
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Elastic Demand
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A demand for a product or resource whose price elasticity is greater than 1. (consumers are sensitive to price increases and may not purchase).
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Inelastic Demand
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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).
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Consumer responsiveness is measured in _______ change, not ______ change.
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percentage, absolute
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Unit Elasticity
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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).
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Perfectly Inelastic Demand
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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.
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Perfectly Elastic Demand
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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.
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The importance of elasticity for firms is the net effect on _____ ______.
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total revenue
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Total Revenue equals
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product price (P) times the quantity sold (Q).
TR = P x Q |
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If demand is elastic, a decrease in price will ______ total revenue.
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increase
(i.e. airline tickets) |
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If demand is inelastic, a decrease in price will ______ total revenue.
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reduce
(i.e. toothpaste) |
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Price Elasticity of Demand is greater...
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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. |
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Demand is typically elastic in the _________ _________ range of the demand curve.
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high-price, low-quantity
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Price Elasticity of Supply
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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 |
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The degree of Price Elasticity of Supply depends on...
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the ease of shifting resources between alternative uses.
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Cross Elasticity of Demand
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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 |
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A positive Cross Elasticity of Demand coefficient indicates the two products are _________ _______.
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substitute goods
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A negative Cross Elasticity of Demand coefficient indicates the two products are __________ ______.
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complimentary goods
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The Cross Elasticity of Demand indicates...
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how sensitive the purchase of one product is to changes in the price of another product.
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Income Elasticity of Demand
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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 |
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The Income Elasticity of Demand coefficient is positive for ______ _____ and negative for ________ ______.
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normal goods, inferior goods
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Consumer Surplus
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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).
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Producer Surplus
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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). |
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Efficiency Loss
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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).
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Underproduction creates Efficiency Losses because output is not...
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being produced for which maximum willingness to pay exceeds minimum acceptable price.
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Overproduction creates Efficiency Losses because output is...
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being produced for which minimum acceptable price exceeds maximum willingness to pay.
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Market Period
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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.
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Short Run
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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.
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Long Run
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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.
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If the quantity supplied by producers is relatively sensitive to price changes, supply is _______.
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elastic
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If the quantity supplied by producers is relatively insensitive to price changes, supply is _______.
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inelastic
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Elastic =
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sensitive to price changes. (coefficient > 1)
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Inelastic =
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insensitive to price changes. (coefficient < 1)
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Regardless of the degree of elasticity or inelasticity of supply, price and _______ always move together.
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revenue
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The coefficient of Cross Elasticity of Demand can be...
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either positive or negative.
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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 ______ _____.
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substitute goods
(i.e. an increase in the price of Evian causes consumers to buy more Dasani) |
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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 _______ ______.
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complimentary goods
(i.e. a digital camera and a memory stick) |
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A zero or near zero coefficient of Cross Elasticity of Demand indicates...
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that the two products are unrelated.
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For normal goods, the Income Elasticity of Demand is _______.
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possitive
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For inferior goods, the Income Elasticity of Demand is _______.
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negative
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During a recession, products with a relatively high positive Income Elasticity of Demand coefficients are...
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greatly affected.
(i.e. automobiles, housing, and restaurant meals) |
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Economic Efficiency consists of _______ _______ and _______ _______.
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Productive Efficiency, Allocative Efficiency
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Productive Efficiency
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The production of a good in the least costly way.
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Allocative Efficiency
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The apportionment of resources among firms and industries to obtain the production of the products most wanted by society.
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