Econ203 Chapter 5.4-5.5 & Appendix
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