Econ203 Chapter 5.4-5.5 & Appendix

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As the number of available substitutes grows, the price elasticity of demand (increases/decreases).

increases

As you spend more of your budget on a good, the price elasticity of demand (increases/decreases).

increases

Goods with a price elasticity demand less than 1 have

inelastic demand.

A good is inferior if the quantity demanded is (directly/inversely) related to income; when income rises, consumers buy (more/less) of an inferior good.

inversely; less

Consumers respond much (more/less) to price changes in the short run than in the long run.

less

On the lower half of a linear demand curve, the elasticity is

less than 1.

goods with an elasticity above 1 are called

luxury goods

consumer surplus can be computed by

taking the area of the demand curve (Price v. Quantity Sold)

Theoretically, demand may be perfectly elastic, meaning

the demand is highly responsive to price changes- the smallest increase in price causes consumers to stop consuming goods altogether

consumer surplus

the difference between the willingness to pay and the price paid for a good

Income elasticity of demand is

the measurement of the percentage change in quantity demanded of a good due to a percentage change in the consumer's income

price elasticity of demand measures

the percentage change in quantity demanded of a good resulting from a percentage change in the good's price

Demand can be perfectly inelastic, meaning

the quantity demanded is completed unaffected by price; phrase "gotta have it"

Describe what will happen when the price elasticity of demand is equal to 1.

When the price elasticity of demand is equal to 1, the percentage change in quantity demanded is equal tot he percentage change in price. This means that the price increase will leave revenues unchanged.

Describe what will happen when the price elasticity of demand is greater than 1.

When the price elasticity of demand is greater than 1, the percentage change in quantity demanded is greater than the percentage change in price. This means that any price increase will lead to lower revenues.

Describe what will happen when the price elasticity of demand is less than 1.

When the price elasticity of demand is less than 1, the percentage change in quantity demanded is less than the percentage change in price. This means that the price increase will lead to higher revenues.

A good is normal if the quantity demanded is (directly/inversely) related to income; when income rises, consumers buy (more/less) of a normal good.

directly; more

Goods with a price elasticity demand greater than 1 have

elastic demand

In the middle of the demand curve, the elasticity is

exactly equal to 1.

Complements are

goods in which the fall in the price of one leads to a right shift in the demand curve (greater demand) for another

Substitutes are

goods in which the rise in price of one leads to a right shift in the demand curve (greater demand) for another.

On the upper half of a linear demand curve, the elasticity is

greater than 1.

Income elasticity formula

income elasticity= (percentage change in quantity demanded)/ (percentage change in income)

Cross-price elasticity equation

Cross-price elasticity= (percentage change in quantity demanded of good x)/ (percentage change in price of good y)

3 forms of elasticities

1. The price elasticity of demand 2. The cross-price elasticity of demand 3. The income elasticity of demand

3 primary reasons for elasticity differences:

1. closeness of substitutes 2. budget share spent on the good 3. available time to adjust

Higher price elasticities mean that consumers are (more/less) responsive to a change in price.

More

Is elasticity constant over the entire demand curve? Why or why not?

No. Because, although the slope is the same over the entire demand curve, the elasticity varies, because the ratio of price to quantity is different along the demand curve.

substitution effect is

a consumption change that results when a price change moves the consumer along a given indifference curve

income effect is

a consumption change that results when a price change moves the consumer to a lower or higher indifference curve

Cross-price elasticity of a demand is

a measurement of the percentage change in quantity demanded of a good due to a percentage change in another good's price

utility is

an abstract measure of satisfaction

price elasticity of demand equation

price elasticity of demand= (percentage change in quantity demanded)/ (percentage change in price)

Elasticity measures

the sensitivity of one economic variable to a change in another; ratio of percentage changes in variables

An indifference curve is

the set of bundles that provide an equal level of satisfaction for the consumer

If the cross-price elasticity is negative,

then the two goods are complements.

If the cross-price elasticity is positive,

then the two goods are substitutes.

Goods with a price elasticity of demand equal to 1 have

unit elastic demand, meaning that a 1% price change affects quantity demanded by exactly 1%

The budget constraint summarizes _________ and the indifference curve summarizes _________

what you can afford; what you like


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