Chapter 6: Elasticity

Unit elastic demand

a decrease in price results in the same percentage increase in quantity demanded

Vertical demand curve

means that quantity demanded does not change as price changes So, elasticity is zero It is *perfectly inelastic*

An increase in the price of a substitute for iPads will lead to _______________________ in the quantity demanded of iPads so the cross-price elasticity of demand will be ____________________.

an increase, positive

Horizontal demand curve

means that quantity demanded is infinitely responsive to price changes Elasticity is *infinite* It is *perfectly elastic*

If products are complements, the *cross-price elasticity of demand* will be..

negative

When you compute a price elasticity of demand, the answer is always:

negative

Complementary goods would result in __________________ cross-price elasticity and a _________________ in quantity demanded as a result of a price increase

negative, decrease

If products are substitutes, the *cross-price elasticity of demand* will be..

positive

The price elasticity of supply always has a:

positive value

If the supply of Good B is perfectly elastic and price falls, the quantity supplied will:

fall to zero.

Normal goods

goods and services for which the quantity demanded increases as income increases

The more substitutes that exist for a particular product, the __________ the price elasticity of demand/

greater

If PED is unit elastic

Absolute value of Price Elasticity is *equal to 1*

If PED is elastic

Absolute value of Price Elasticity is *greater than 1*

If PED is inelastic

Absolute value of Price Elasticity is *less than 1*

Inferior goods

Goods and services for which the quantity demanded falls as income increases.

Price elasticity of demand

Percentage change in quantity demanded/percentage change in price

Cross-price elasticity of demand for two goods that are unrelated?

Zero

If the income elasticity of SUVs is greater than 1, what is the good considered?

a luxury. Luxury goods are more responsive to changes in income so have elasticities above 1.

elasticity

a measure of how much one economic variable responds to changes in another economic variable, based on *percentage changes* in the variables.

Food

a necessity, so consumption is likely independent of income level. *inelastic*

If the cross-price elasticity of demand between two products is -3.0, then the two products are:

complements

If the price elasticity of supply is 0.4, then a 20% increase in price will ________________ the quantity supplied by _______________%.

increase, 8.0 0.40 x 20% = 8.0%

Price elasticity of demand

is a measure of responsiveness of the change in quantity demanded of a good to the change in its price.

Along a linear demand curve, the slope ____________________ while the price elasticity of demand ________________________________________________________________.

is constant, changes from one point to another

If supply is *inelastic* , the value of price elasticity is

less than 1

Unit price elastic

price elasticity of demand is exactly qual to (negative) 1

Price elastic

price elasticity of demand is larger (in absolute value) than 1.

Price inelastic

price elasticity of demand is smaller (in absolute value) than 1.

If supply is inelastic,

quantity supplied cannot change much in response to the demand change; *so the price will rise a lot*

Perfectly inelastic demand

the case where the quantity demanded is completely unresponsive to price and the price elasticity of demand equals zero.

Perfectly elastic demand

the case where the quantity demanded is infinitely responsive to price and the price elasticity of demand equals infinity.

If prices rise, the quantity supplied will be greater:

the longer the time that elapses. If producers have more time they will be able to adjust production in response to the price change.

Private education

the most highly income elastic. Private education is a luxury good that people will consume more of if their income increases, and less of if their income falls.

A special case occurs when price elasticity of demand is -1:

the percentage change in quantity demanded equals the percentage change in price so revenue does not change.

Cross-price elasticity of demand

the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. It measures the *strength* of substitute or complement relationships between goods. Percentage change in quantity demanded of one good/Percentage change in price of another good.

Perfectly inelastic demand curve

the quantity demanded remains constant regardless of price. Ex: Medicine that is necessary for an individual.

Percentage change

A - B/ (A + B)/2

If supply is *unit elastic* , the value of price elasticity is

equal to 1

If the income elasticity of demand is *negative* , then the good is

inferior

If the income elasticity of demand is *positive and greater than 1* , then the good is

normal and a luxury

Determinants of the Price Elasticity of Demand

(1) Availability of close substitutes (2) Passage of time (3) Whether the good is a luxury or a necessity. (higher for luxuries) (4) Definition of the market Ex: more substitutes, more elasticity (5) The share of a good in a consumer's budget Ex: buying table salt once a year or less.. changes in price will not affect very much how much you buy. (*elastic if you are sensitive to price*)

If supply is elastic,

*price will rise much less*

If supply is *perfectly inelastic* , the value of price elasticity is

equal to 0

If supply is *perfectly elastic* , the value of price elasticity is

equal to infinity

If supply is *elastic* , the value of price elasticity is

greater than 1

The more vertical the demand curve, the more _____________ the good.

inelastic

The disappearance of the family farm ban be partially atttricuted to the fact that the elasticity of demand for wheat is ________________, while at the same time, the income elasticity for wheat is _________.

inelastic, low

At current prices of a highly addictive drug, the demand for the drug is highly price:

inelastic. Since the drug is addictive, the consumer will demand the drug regardless of price.

Economists avoid confusion over units in the computation of elasticity by using:

percentage changes

If the products are unrelated, the *cross-price elasticity of demand* will be..

zero.

Determinants of the price elasticity of supply

The *time period* in question is critically important: Short time - elastic Long time - inelastic

Price elasticity of supply

a measure of responsive of the change in quantity supplied of a good to the change in its price.

Income elasticity of demand

a measure of the responsiveness of the quantity demanded to changes in income, measured by the percentage change in the quantity demanded divided by the percentage change in income.

Perfectly elastic demand curve

a price change shifts the quantity demanded to zero.

Percentage change in price

Average of two prices as denominator, difference between the two prices as numerator, times 100

The income elasticity for peanut butter is -3. This defines peanut butter as what type of good?

an inferior good

The more horizontal the demand curve, the more ___________ the good

elastic

If a 20 percent increase in the price of Red Bull energy drinks results in a decrease in quantity demanded of 25 percent, we say the demand for Red Bull is ____________ in this range.

elastic Price elasticity of demand: -25/20 = -1.25 Red Bull is considered elastic since the absolute value of the coefficient exceeds 1.

Perfectly inelastic supply curve

indicates the quantity supplied does not respond to a change in price.

If the income elasticity of demand is *positive but less than 1*, then the good is

normal and a necessity.

Total revenue

the total amount of funds received by a seller of a good or service, calculated by *multiplying the price per unit by the number of units sold*. *Know PED to answer total revenue questions*