Chapter 6

income elasticity of demand definition

% change in quantity demanded/ % change in income measure of how much the demand for a good is affected by changes in consumers' incomes normal good - when income elasticity of demand is positive inferior good - when income elasticity of demand is negative

price elasticity of supply

% change in quantity supplied/ % change in price

midpoint method - math

% change in x = (change in x)/(avg value of x) * 100 avg value of x = (start value of x + final value of x)/2 when calculating price elasticity using midpoint method, the % change in price and % change in quant demanded are both found using this method

perfectly elastic demand

horizontal demand curve. change in quantity demanded, but no change in price. "infinite price elasticity"

measure of how strongly complementary two goods are

if cross-price elasticity is only slightly below zero, weak complements. if very negative, strong complements.

income-elastic

if the income elasticity of demand for that good is greater than 1. when income rises, the demand for income elastic goods rises faster than income

income-inelastic

if the income elasticity of demand for that good is positive but less than 1. when income rises, the demand for income inelastic goods rises, but more slowly than income

negative income elasticity of demand

inferior good: quantity demanded falls when income rises

income elasticity of demand

measure how demand is affected by changes in income

cross-price elasticity of demand

measure how the demand for a good is affected by prices of other goods.

price elasticity along the demand curve

price elasticity is in reference to the current price along a demand curve. can be different along the same curve

unit-elastic demand

price elasticity of demand is = 1

perfectly inelastic supply

price elasticity of supply = 0, an increase in price leaves the quantity supplied unchanged

perfectly elastic supply

price elasticity of supply = infinite, at a specific price, producers will supply any quantity but below that price, they will supply none

positive cross price elasticity of demand

substitutes: quantity demanded of one good rises when the price of another falls

measure of how closely substitutable two goods are

the positive and larger the number, the closer the subsitute

demand is is considered inelastic when....

the quantity demanded will fall by a relatively low percentage when price rises.

total revenue =

total value of sales of a good or service = price x quantity sold

perfectly inelastic demand

vertical demand curve. zero price elasticity of demand. percent change in quantity demanded is zero for any change in the price

elastic

when price elasticity of demand is greater than 1

inelastic

when price elasticity of demand is less than 1

demand is is considered highly elastic when....

...the price elasticity of demand is large. when consumers change their quantity demanded by a large percentage compared with the percent change in price.

What factors determine the price elasticity of demand?

1. availability of close substitutes 2. whether the good is a necessity or luxury 3. share of income spent on good 4. time elapsed since price change

What factors determine the price elasticity of supply?

1. the availability of inputs 2. time

Law of demand

Demand curves are downward sloping so price and quantity demanded always move in opposite directions

Price elasticity of demand

Ratio of the percent change in quantity demanded to the percent change in price

price effect

after a price increase, each unit sold sells at a higher price which tends to raise revenue

quantity effect

after a price increase, fewer units are sold, which tends to lower revenue

negative cross price elasticity of demand

complements: quantity demanded of one good falls when the price of another rises

midpoint method

method used to avoid computing different elasticities for rising and falling prices

greater than one income elasticity of demand

normal good, income elastic: quantity demanded rises when income rises, and more rapidly than income

positive less than one income elasticity of demand

normal good, income-inelastic: quantity demanded rises when income rises but not as rapidly as income

cross-price elasticity of demand defined as...

percent change in the quantity demanded of one good to the percent change in the price of the other