EC201 Chapter 5 Key Concepts

If demand is elastic, a higher price yields _____ revenue.

less

Necessities are things that you really can't do without or can't live without. So, your demand for necessity goods is _____, meaning that you would _____ when the prices rise.

less elastic; still keep buying

If demand is inelastic, a higher price yields _____ revenue.

more

Income elasticity of demand is positive for _____ goods and negative for _____ goods.

normal; inferior

price elasticity of demand equation

percent change in quantity demanded / percent change in price

income elasticity of demand equation

percent change in quantity demanded / percent change in income

perfectly inelastic demand

When quantity does not respond at all to a price change.

percent change in price equation

((P2 - P1) / ((P2 + P1) / 2)) * 100

percent change in quantity equation

((Q2 - Q1) / ((Q2 + Q1) / 2)) * 100

The price elasticity of supply reflects the flexibility of firms to increase or decrease the quantity supplied. It is larger:

1. For firms that store inventories 2. When inputs are easily available 3. For firms with extra capacity 4. When firms can easily enter and exit the market 5. When there's more time to adjust

Different demand elasticities measure the responsiveness of the quantity demanded to:

1. Price elasticity of demand (price of this good) 2. Cross-price elasticity of demand (price of another good) 3. Income elasticity of demand (income)

price elasticity of demand

A measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change.

total revenue

The total amount you receive from buyers equation: price * quantity.

perfectly elastic demand

When any change in price leads to an infinitely large change in quantity.

elastic

When the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price, which means that the absolute value of the price elasticity is greater than 1.

inelastic

When the absolute value of the percent change in quantity is smaller than absolute value of the percent change in price, which means that the absolute value of the price elasticity is less than 1.

The price elasticity of demand reflects the availability of substitutes. It is larger...

1. When there are more competing products 2. For specific brands rather than broad categories 3. For things that aren't necessities 4. When consumers search more 5. When there's more time to adjust

price elasticity of supply

A measure of how responsive sellers are to price changes. It measures the percent change in quantity supplied that follows from a 1% price change.

income elasticity of demand

A measure of how responsive the demand for a good is to changes in income. It measures the percent change in quantity demanded that follows from a 1% change in income.

cross-price elasticity of demand

A measure of how responsive the demand of one good is to price changes of another. It measures the percent change in quantity demanded that follows from a 1% change in the price of another good.

cross-price elasticity of demand equation

percent change in quantity demanded / percent change in price of another good

price elasticity of supply equation

percent change in quantity supplied / percent change in price

percent change in quantity demanded equation

price elasticity of demand * percent change in price

The cross-price elasticity is positive for _____, negative for _____, and near zero for _____.

substitutes; complements; independent goods