Chapter 5

True or false? Perfectly inelastic shows a vertical demand curve

true

True or false? The elasticity of demand in any market depends on how we draw the boundaries of the market.

true

How is perfectly elastic shown on the supply curve?

Horizontal supply curve

What does price elasticity depend on?

The price elasticity of supply depends on the flexibility of sellers to change the amount of the good they produce.

Elasticity

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

Midpoint method for calculating elasticities-

computes a percentage change by dividing the change by the midpoint (or average) of the initial and final levels. -Because it gives the same answer regardless of the direction of change, it is often used when calculating the price elasticity of demand between two points.

total revenue

the amount a firm receives for the sale of its output total revenue is , the price of the good times the quantity of the good sold.

True or false? Goods tend to have more elastic demand over longer time horizons.

true

Describe the rule of thumb regarding price elasticity and slope:

-Because the price elasticity of demand measures how much quantity demanded responds to changes in the price, it is closely related to the slope of the demand curve. The following rule of thumb is a useful guide: -The flatter the demand curve passing through a given point, the greater the price elasticity of demand. -The steeper the demand curve passing through a given point, the smaller the price elasticity of demand.

When is demand for a good considered elastic versus inelastic?

-Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. -Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.

Describe some markets where the elasticity of supply is not constant but varies over the supply curve

-For low levels of quantity supplied, the elasticity of supply is high, indicating that firms respond substantially to changes in the price. In this region of the supply curve, firms have additional capacity for production, such as plants and equipment that are idle for all or part of the day. -Small increases in price make it profitable for firms to begin using this idle capacity. -As the quantity supplied rises, firms begin to reach capacity. Once capacity is fully used, further increases in production require the construction of new plants. -To induce firms to incur this extra expense, the price must rise substantially, so supply becomes less elastic.

Describe elasticity of narrowly defined markets

-Narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close substitutes for narrowly defined goods. -For example, food, a broad category, has a fairly inelastic demand because there are no good substitutes for food. Ice cream, a narrow category, has a more elastic demand because it is easy to substitute other desserts for ice cream. Vanilla ice cream, an even narrower category, has a very elastic demand because other flavors of ice cream are almost perfect substitutes for vanilla.

How does total revenue change as one moves along the demand curve?

-The answer depends on the price elasticity of demand. If demand is inelastic, as in panel (a) of Figure 3, then an increase in the price causes an increase in total revenue -We obtain the opposite result if demand is elastic: An increase in the price causes a decrease in total revenue.

What does the price of elasticity demand for any good measure?

-how willing consumers are to buy less of the good as its price rises. -Because a demand curve reflects the many economic, social, and psychological forces that shape consumer preferences, there is no simple, universal rule for what determines a demand curve's elasticity. -Based on experience, however, we can state some rules of thumb about what influences the price elasticity of demand.

What is a determinant of price elasticity of supply?

-the time period being considered. -Supply is usually more elastic in the long run than in the short run. -Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good. -------thus, in the short run, the quantity supplied is not very responsive to changes in the price. -Over longer periods of time, firms can build new factories or close old ones. In addition, new firms can enter a market, and old firms can exit. -------Thus, in the long run, the quantity supplied can respond substantially to price changes.

What does a larger price elasticity imply?

A greater responsiveness of quantity demanded to changes in price

Engel's Law

As a family's income rises, the percent of its income spent on food declines, indicating an income elasticity less than one.

When is demand considered elastic?

Demand is considered elastic when the elasticity is greater than one, which means the quantity moves proportionately more than the price.

When is demand considered inelastic?

Demand is considered inelastic when the elasticity is less than one, which means the quantity moves proportionately less than the price.

How can you calculate the price of elasticity of demand?

Price elasticity of demand = (percentage of quantity)/ percentage change in price

How is being perfectly inelastic shown on the supply curve?

Supply curve is vertical

Why is the statement: Even though the slope of a linear demand curve is constant, the elasticity is not, true?

This is true because the slope is the ratio of changes in the two variables, whereas the elasticity is the ratio of percentage changes in the two variables.

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income -Income elasticity of demand= (percentage change in quantity demanded)/ percentage change in income -most goods are normal goods: Higher income raises the quantity demanded. Because quantity demanded and income move in the same direction, normal goods have positive income elasticities. A few goods, such as bus rides, are inferior goods: Higher income lowers the quantity demanded. Because quantity demanded and income move in opposite directions, inferior goods have negative income elasticities. -Necessities such as food tend to have small income elasticities because consumers choose to buy some of these goods even when their incomes are low\ -luxuries such as jewelry and recreational goods tend to have large income elasticities because consumers feel that they can do without these goods altogether if their incomes are too low.

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price -Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. -Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price.

cross-price elasticity of demand-

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good -Cross price elasticity of demand = (percentage change in quantity demanded of good one)/ percentage change in the price of good two -Whether the cross-price elasticity is positive or negative depends on whether the two goods are substitutes or complements. ----substitutes are goods that are typically used in place of one another, such as hamburgers and hot dogs. An increase in hot dog prices induces people to grill more hamburgers instead. Because the price of hot dogs and the quantity of hamburgers demanded move in the same direction, the cross-price elasticity is positive. Conversely, complements are goods that are typically used together, such as computers and software. In this case, the cross-price elasticity is negative, indicating that an increase in the price of computers reduces the quantity of software demanded.

price elasticity of supply-

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price -Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the price. -Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price. -Price elasticity of supply= (percentage change in quantity supplied)/(percentage change in price)

substitutes

goods that are typically used in place of one another, such as hamburgers and hot dogs. -An increase in hot dog prices induces people to grill more hamburgers instead. Because the price of hot dogs and the quantity of hamburgers demanded move in the same direction, the cross-price elasticity is positive. -Conversely, complements are goods that are typically used together, such as computers and software. In this case, the cross-price elasticity is negative, indicating that an increase in the price of comp

True or false? A good with close substitutes tends to have more elastic demand because it is easier for consumers to switch from that good to others.

true

True or false? Elasticity is a measure of how much buyers and sellers respond to changes in market conditions.

true

True or false? If the elasticity is exactly one, the percentage change in quantity equals the percentage change in price, and demand is said to have unit elasticity.

true

True or false? Necessities tend to have inelastic demands, whereas luxuries have elastic demands.

true

True or false? Perfectly elastic shows horizontal line

true

True or false? Because the quantity demanded of a good is negatively related to its price, the percentage change in quantity will always have the opposite sign as the percentage change in price.

true -For this reason, price elasticities of demand are sometimes reported as negative numbers.