Chapter 5

income elasticity of demand

the responsiveness of the quantity demanded of a product to a change in consumers' incomes in case of normal goods, it's always positive in case of inferior goods, it's always negative

price elasticity of demand

the responsiveness of the quantity demanded of a product to a change in its price

cross-price elasticity of demand

the responsiveness of the quantity demanded of a product to a change in the prices of other products for unrelated products, it's zero for substitutes, it's positive for complements, it's negative

price elasticity of supply

the responsiveness of the quantity supplied of a product to a change in its price

make it the midpoint

to calculate the elasticity at an exact point,

price elastic

when the supply of a product increase and demand is _______, TR and TE increase

elastic supply

1% decrease in price will result in a greater than 1% decrease in supply

inelastic supply

1% decrease in price will result in a less than 1% decrease in supply

unit elastic demand

a change in the price of a product does not affect either total revenue received by its producers or total expenditure on that by consumers (total revenue is maximized)

elasticity

a measure of how much one economic variable responds to changes in another economic variable

determinants of the price elasticity of demand

are there available substitutes? is the product a necessity or a luxury? is the product a big-ticket item? how long does it take consumers to respond to price changes?

linear

if demand for a product is ________, demand is price elastic at high prices and price inelastic at low prices

flatter

the ______ the supply curve as i passes through a point, the more elastic supply is at that point

steeper

the ________ the supply curve as it passes through a point, the less elastic supply is at that point

TR and TE increase when price increases, and TR and TE decrease when price falls

the demand for a product is inelastic when...

TR and TE increase when the price decreases, and TR and TE decrease when price increases

the demand for a product is price elastic when...

their ability to adjust inputs, how long it takes them to respond to a change in price, and how easily they can enter or exit the market for the product

the ease with which producers can adjust the quantity supplied depends on 3 factors

the larger the price elasticity of demand at that point

the flatter the demand curve is as it passes through a certain point,

midpoint method

the method used to calculate an elasticity using the average price over the range for P and the average quantity over the range for Q

perfectly elastic demand

the situation in which any quantity could be demanded, but only at one price. The demand curve is horizontal.

perfectly elastic supply

the situation in which any quantity could be supplied, but only at one price. The supply curve is horizontal.

unit elastic demand

the situation in which price elasticity of demand is exactly equal to 1

price elastic demand

the situation in which price elasticity of demand is great than 1. This means that a 1% increase in price will result in greater than a 1% decrease in quantity demanded

price inelastic demand

the situation in which price elasticity of demand is less than 1. This means that a 1% increase in price will result in less than a 1 % decrease in quantity demanded.

unit elastic supply

the situation in which price elasticity of supply is exactly equal to 1

price elastic supply

the situation in which price elasticity of supply is greater than 1. This means that a 1% increase in price will result in greater than a 1% increase in quantity supplied

price inelastic supply

the situation in which price elasticity of supply is less than 1. This means that a 1% increase in price will result in less than a 1% increase in quantity supplied

perfectly inelastic demand

the situation in which quantity demanded does not depend on the price. The demand curve is vertical

perfectly inelastic supply

the situation in which quantity supplied does not depend on the price. The supply curve is vertical

the smaller the price elasticity of demand at that point

the steeper the demand curve is as it passes through a certain point,

need to know the price elasticity of demand

to determine whether total revenue and total expenditure will increase or decrease when the price of a product changes

elastic

when a 1% decrease in price results in a greater than 1% increase in quantity demanded

inelastic

when a 1% decrease in price results in a less than 1% increase in quantity demanded

price inelastic

when the supply of a product increases and demand for it is ________, TR and TE decrease.