Elasticity

Income Elasticity of Demand

-Percentage change in quantity demanded divided by percentage change in income.

Cross-Price Elasticity of Demand

-Percentage change in the quantity demanded of X divided by percentage change in price of Y.

Demand Curve

-A curve describing the quantities of a good a consumer is willing and able to buy at alternative prices in a given period.

(1) Complete this sentence: "What the theater owner wants to know is _____________". 12th edition, p 95

-By how much the quantity demanded would fall if the price were raised.

(24) Complete this sentence: If Cross-Price Elasticity is negative, then the two goods are _____ . [13th edition, p 128; 12th edition, p 107; 11th edition, p 103]

-Complements

(5) For simplicity, how do we usually express our price elasticity of demand coefficients? 12th edition, p 96;

-E is typically expressed in absolute terms WITHOUT the minus sign.

(7) What does it mean for a product to have "elastic demand"? 12th edition, pp 96 - 98;

-E(price) is larger than 1. -Consumer response is large relative to change in price.

(8) What does it mean for a product to have "inelastic demand"? [13th edition, pp 119 - 121; 12th edition, pp 96 - 98; 11th edition, pp 93 - 94]

-E(price) is less than 1. -Consumers aren't very responsive to price change.

Inferior Good

-Goods for which demand DECREASES when income rises.

Normal Good

-Goods for which demand INCREASES when income rises.

Complementary Good

-Goods frequently consumed in combination; when the price of good X rises, the demand for good Y falls.

Substitute Good

-Goods that substitute for each other; when the price of a good X rises, the demand for good Y increases.

(3) Complete this sentence: "The Law of Demand implies that price elasticity of demand will always be ___ ." 12th edition, p 96;

-Greater than zero.

(6) Complete this sentence: "The key question, then, is ______________." 12th edition, p 96;

-How much greater than zero E actually is.

(20) Explain this statement "A price hike does not change total revenue if product demand is unitary elastic." [13th edition, pp 123 - 126; 12th edition, pp 101 - 103; 11th edition, pp 97 - 98]

-If E(price) equals 1.

(19) Explain this statement "A price hike reduces total revenue when product demand is elastic." [13th edition, pp 123 - 126; 12th edition, pp 101 - 103; 11th edition, pp 97 - 98]

-If E(price) is greater than 1.

(18) Explain this statement "A price hike increases total revenue when product demand is inelastic." [13th edition, pp 123 - 126; 12th edition, pp 101 - 103; 11th edition, pp 97 - 98

-If E(price) is less than 1.

(26) Complete this sentence: If Income Elasticity is negative, then the product is classified as a _____ . [13th edition, p 130; 12th edition, p 105; 11th edition, p 101]

-Inferior Goods

(12) List the FOUR determinants of elasticity. [13th edition, pp 122 - 123; 12th edition, pp 99 - 101; 11th edition, pp 95 - 97]

-Necessities vs. Luxuries =Demand for necessities is inelastic. =Demand for luxury good is elastic. -Availability of Substitutes =The greater the availability of substitutes, the higher the price elasticity demand. -Relative Price (to income) =The price elasticity of demand declines as price moves down the demand curve. -Time =The long-run price elasticity of demand is higher than the short-run elasticity.

(4) Will a price elasticity of demand coefficient be a positive number or a negative number? Explain why! 12th edition, p 96;

-Negative number. -Because quantity demanded and price always move in OPPOSITE directions.

(25) Complete this sentence: If Income Elasticity is positive, then the product is classified as a _____ . [13th edition, p 130; 12th edition, p 105; 11th edition, p 101]

-Normal Goods

(11) In the REAL WORLD, are we likely to locate products that have "perfectly elastic demand" or "perfectly inelastic demand"? [13th edition, see Figure 6.2 on page 120; 12th edition, see Figure 5.4 on page 98; 11th edition, see Figure 5.4 on page 94]

-Perfectly Elastic.

(23) Complete this sentence: If Cross-Price Elasticity is positive, then the two goods are _____ . [13th edition, p 128; 12th edition, p 107; 11th edition, p 103]

-Substitutes

(9) What does it mean for a product to have "perfectly elastic demand"? As a part of your answer, be sure to mention what the shape of the demand curve would look like. [13th edition, see Figure 6.2 on page 120; 12th edition, see Figure 5.4 on page 98; 11th edition, see Figure 5.4 on page 94]

-The demand curve would be HORIZONTAL. -Any increase in price would cause quantity demanded to fall to zero.

10) What does it mean for a product to have "perfectly inelastic demand"? As a part of your answer, be sure to mention what the shape of the demand curve would look like. [13th edition, see Figure 6.2 on page 120; 12th edition, see Figure 5.4 on page 98; 11th edition, see Figure 5.4 on page 94]

-The demand curve would be VERTICAL> -Increase in price won't affect the quantity demanded.

(22) For a given product (like the packs of cigarettes example used in the text), describe how the price elasticity of demand coefficient changes as we move toward the "southeast" along the product's demand curve. [13th edition, pp 125 - 126 and Figure 6.4; 12th edition, pp 101 - 103 and Figure 5.6; 11th edition, pp 98 - 99 and Figure 5.6]

-The impact of a price change on total revenue depends on the changing price elasticity of demand.

Total Revenue

-The price of a product multiplied by the quantity sold in a given time period.

Law of Demand

-The quantity of a good demanded in a given time period increases as its price falls.

(2) Complete this sentence: " _________________ is measured by the price elasticity of demand." 12th edition, p 95

-The response of consumers to a change in price.

Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price.