micro exam 1: ch 6
if demand is inelastic,
- a price decline decreases total revenue - a price increase increases total revenue
if demand is elastic,
- a price rise decreases total revenue - a price decline increases total revenue
income unit elastic
- condition that exists when the percentage change in quantity demanded is equal to the percentage change in income - Ey = 1
income elastic
- exists when percentage change in quantity demanded of a good is greater than the percentage change in income - Ey > 1
income inelastic
- exists when the percentage change in quantity demanded of a good is less than the percentage change in income - Ey < 1
if income elasticity is greater than 0
its a normal good
if income elasticity is less than 0
its an inferior good
total revenue
price times quantity sold
Why will government raise more tax revenue if it applies a tax to a good with inelastic demand than if it applies the tax to a good with elastic demand?
tax revenue is equal to the tax times the quantity sold. if demand is inelastic, then the higher price brought about by the tax will result in a smaller cutback in quantity sold.
inelastic demand
- quantity demanded changes proportionately less than price changes - Ed < 1 - occurs when the percentage change in quantity demanded is less than the percentage change in price
elastic demand
- quantity demanded changes proportionately more than price changes - Ed > 1 - occurs when percentage change in quantity demanded is greater than percentage change in price
unit elastic demand
- quantity demanded changes proportionately to price change - Ed = 1 - occurs when the percentage change in quantity demanded is equal to the percentage change in price
perfectly inelastic demand
- quantity demanded does not change as price changes - Ed = 0
perfectly elastic demand
- quantity demanded is extremely responsive to even very small changes in price - Ed = infinity - when a small percentage change in price causes an extremely large percentage change in quantity demanded
determinants of price elasticity of demand
1. number of substitutes 2. necessities vs. luxuries 3. percentage of one's budget spent on the good 4. time
what does perfectly inelastic supply signify?
A change in price does not change quantity supplied.
on Tuesday, the price and quantity demanded are $7 and 120 units. Ten days later, the price and quantity demanded are $6 and 150 units. What is the price elasticity of demand between the $7 and $6 prices?
Ed = 1.44
cross elasticity of demand
a measure of the responsiveness in quantity demanded of one good to changes in the price of another good
income elasticity of demand
a measure of the responsiveness of quantity demanded to changes in income
price elasticity of demand
a measure of the responsiveness of quantity demanded to changes in price - percentage change in quantity demanded for a given percentage change in price
if demand is unit elastic,
a rise or fall in price leaves total revenue unchanged
perfectly elastic supply
a small change in price changes the quantity supplied by an infinitely large amount
price elasticity of demand is predicted to be higher for which good of the following combinations of goods? a.) dell computers or computers b.) Heinz ketchup of ketchup c.) Perrier water or water explain.
a.) dell computers b.) Heinz ketchup c.) Perrier water in all three cases, the good with the higher price elasticity of demand is the more specific of the two goods; therefore, it has more substitutes
what does a price elasticity of demand of .39 mean?
if there is a change in price, the quantity demanded will change by 0.39 times the percentage change in price.
what does the income elasticity of demand of 1.33 mean?
means that the good in question is a normal good, and that it is income elastic; that is, as income rises, the quantity demanded rises by a greater percentage.
price elasticity of supply
measure of the responsiveness of quantity supplied to changes in price
if good X has 7 substitutes and demand is inelastic, then if there are 9 substitutes for good X, will demand be elastic? explain.
no, moving from 7 to 9 substitutes doesn't necessarily change demand from being inelastic to elastic. it simply leads to a rise in price elasticity of demand.
elastic supply
percentage change in quantity supplied is greater than the percentage change in the price - Es > 1
unit elastic supply
percentage change in quantity supplied that is equal to the percentage change in price - Es = 1
inelastic supply
percentage change in quantity supplied that is less than the percentage change in price - Es < 1
under what condition would a per-unit tax placed on the sellers of computers be fully paid by the buyers of computers?
that the demand for computers is perfectly inelastic or that the supply of computers is perfectly elastic.
if cross elasticity is less than 0 (negative)
the goods are complements
if cross elasticity is greater than 0 (positive)
the goods are substitutes
the greater the percentage or one's budget that goes to purchase a good...
the higher the price elasticity of demand will be
the more substitutes a good has...
the higher the price elasticity of demand will be
the more that a good is considered a luxury rather than a necessity...
the higher the price elasticity of demand will be
the fewer substitutes a good has...
the lower the price elasticity of demand will be
the smaller the percentage of one's budget that goes to purchase a good...
the lower the price elasticity of demand will be