Quantitative Demand Analysis

Perfectly Elastic Demand

Demand is perfectly elastic if the own price elasticity is infinite in absolute value. In this case the demand curve is horizontal.

Unitary Elastic Demand

Demand is unitary elastic if the absolute value of the own price elasticity is equal to 1.

Conceptually, the quantity consumed of a good is relative responsive to a change in the price of the good when the demand is ___ and relatively unresponsive to changes in price when demand is ___.

Elastic; inelastic

Demand tends to be ___ (more/less) elastic when consumers have more time to react to price changes.

more

What two aspects of elasticity are important?

1. Whether it is positive or negative 2. Whether it is greater than 1 or less than 1 in absolute value

When the t-statistic is large in absolute value, then we can be confident that the true parameter is not equal to

0

If the absolute value of elasticity is less than 1, the numerator is smaller than the denominator in the elasticity formula. In this instance...

A given percentage change in one variable will lead to a relatively small percentage change in the other variable.

Elasticity

A measure of the responsiveness of one variable to changes in another variable; the percentage change in one variable that arises due to a given percentage change in another variable

Perfectly Inelastic Demand

Demand is perfectly Inelastic if the own price elasticity is zero. In this case the demand curve is vertical.

Own Price Elasticity

A measure of the responsiveness of the quantity demanded of a good to change in the pice of that good; the percentage change in quantity demanded divided by the percentage change in the price of the good.

Inelastic Demand

Demand is Inelastic if the absolute value of the own price elasticity is less than 1

Elastic Demand

Demand is a elastic if the absolute value of the own price of elasticity is greater than 1.

Whether the absolute value of the elasticity is greater or less than 1 determines...

How responsive one variable is to changes in another variable.

If income elasticity of good x is negative, then good X is considered a(n) ___ good.

INferior

Principle: Total Revenue Test

If demand is elastic, an increase (decrease) in price will lead to a decrease (increase) in total revenue. If demand is inelastic, an increase (decrease) in price will lead to and increase (decrease) in total revenue. Finally, the total revenue is maximized at the point where demand is unitary elastic.

When demand is perfectly elastic, a manager who raises prices even slightly will find that...

None of the good is purchased.

What is an example of someonethat may face a demand curve that is perfectly elastic?

Producers of generic (unbranded) products such as aspirin.

When demand is elastic, a price increase will ___ consumption considerably.

Reduce

If the absolute value of the elasticity Is greater than 1, the numerator is larger than the denominator in the elasticity formula, and we know...

That a small percentage change in one variable will lead to a relatively large change in the other variable.

If the numerator is larger than the denominator in the elasticity formula...

The absolute value of the elasticity I greater than 1.

By the law of demand, there is an inverse relation between price and quantity quantity demanded; thus

The own price elasticity of demand is a negative number

What is the t-statistic of a parameter estimate?

The ratio of the value of the estimate to its standard error

What does the sign of elasticity determine?

The sign of elasticity determines the relationship between the variables.