Econ Module 2.5, 2.6, 2.7, & 2.8
Negative Income Elasticity of Demand
Inferior Good (As income increases, QD decreases)
revenue
Price x Quantity
Positive Cross Price Elasticity of Demand
Substitutes (As the Price of one good increases, the Demand for the second good increases) The 2 goods are in Competitive Demand.
specific brands can be substituted
easier than brad categories and have great elasticity
If demand is _____, a higher price yields _____ total revenue.
elastic; lower
availability of substitutes
fewer substitutes means less elastic demand more substitutes means more elastic demand
elastic demand curve is
flat because quantity demand is responsive
you cannot live with out necessities so they
have less elasticity
perfectly elastic 2
if price increases at all you will buy the other option
elastic you lower prices to
increase profit
inelastic you rise prices to
increase profit
since consumers like to search for the best deal demand
is more elastic
With fewer substitutes, demand tends to be
less elastic
grater than 1 income elasticity of demand
luxury good
price elasticity of demand
measures how responsive buyers are to price changes
If a consumer has more time to search for a low-cost alternative for an item, the demand curve for that item will be:
relatively more elastic
If an item is a necessity rather than a luxury, its demand curve will be:
relatively steep.
when demand is inelastic a decrease in summerly increases
revenue
inelastic demand curve is
steep because quantity demanded is unresponsive
elasticity demands all on
substitutes
income elasticity of demand
% change in quantity demanded / % change in income
cross-price elasticity of demand
% change in quantity of A demanded / % change in price of B
Last week, Michelle spent $30$30 on caviar. Today, Michelle still spends $30 on caviar even though its price has doubled. What is Michelle's price elasticity of demand for caviar?
1
Negative Cross Price Elasticity of Demand
Complements (As the Price of one good increases, the Demand for the second good decreases) The 2 goods are in Joint Demand.
Which of the following statements about the price elasticity of demand is correct?
Demand is more elastic in the long run than it is in the short run.
Which of the following could explain why the demand for table salt is inelastic?
Households devote a very small portion of their income to salt purchases.
Positive Income Elasticity of Demand
Normal Good (As income increases, QD increases)
elastic means a modest price rise will lead to
a large decline in quantity
inelastic means a large price rise will lead to
a modest decline in quantity
we use ___________ value to focus on magnitude of Ep
absolute
The demand curve for one particular brand of cough syrup will _____ the demand curve for cough syrup as a general category.
be more elastic than
inelastic demand
buyers are not very responsive to demand
elastic demand
buyers are super responsive to price changes
If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because
buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.
perfectly elastic
curve is horizontal and Ep is infinite
perfectly inelastic
curve is vertical and Ep is 0
share of the budget
demand for a good is more elastic when the good takes a lot of the budget
definition of the market
demand for a particular gas station will be more elastic than the demand for all gas stations
The cross-price elasticity of demand measures how responsive the:
demand for one good is to a change in the price of another good.
Demand for soda outside an airport is more elastic than inside of the airport because:
more choices makes demand more elastic.
Demand for a luxury item tends to be
more elastic
Demand for an item that uses a large portion of your budget tends to be
more elastic
Over longer periods of time, demand tends to be
more elastic.
more competing products means
more substitutes and greater elasticity
perfectly inelastic 2
no matter change in price they will always buy the product
responsiveness of demand changes due to
opportunity cost because Ep is all about how good the next best alternative is
demand gets more elastic
over time
inelastic 2
price change does not change quantity demanded a lot
Income elasticity of demand measures how responsive the:
quantity demanded of a good is to changes in income.
If a certain item has many substitutes, its demand curve will be:
relatively flat.
You have been appointed head of marketing for Barry's Younique Yachts. Barry, the CEO, is interested in determining whether offering his yachts at a lower price would increase the firm's revenue. He asks you for advice.
that he should reduce his prices. Yachts are luxury goods and therefore exhibit a high price elasticity of demand. Thus, reducing prices would increase revenue.
adjustment time
the longer the time horizon the more elastic the demand
The slope of a demand curve is not used to measure the price elasticity of demand because
the measurement of slope is sensitive to the units chosen for price and quantity.
need
the more a good is a necessity the more inelastic the demand will be
Two products have a cross-price elasticity of demand of 1.5. Based on this value of cross-price elasticity, which of the following products are they most likely to be?
two competing brands of soft drinks
Suppose the percent change in the quantity demanded for water for any price change is zero. The demand curve for water is _____, and the price elasticity of demand is perfectly _____.
vertical; perfectly inelastic
