Chapter 6

Cross-price elasticity of demand =

(%change in quantity of A demanded) / (% change in the price of B)

When demand is unit-elastic, total revenue will ________ with a price increase.

not change

Price elasticity of demand

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

Income elasticity of demand =

(% change in quantity demanded) / (% change in income)

Price elasticity of demand =

(% change in quantity demanded) / (% change in price)

Price elasticity of supply =

(% change in quantity supplied) / (% change in price)

We are ________ sensitive to price changes when the good feels expensive.

more

For inferior goods, income elasticity is ________.

negative

If the price of oil increases by 10% and the quantity demanded fall by 5%, then the price elasticity for oil is:

-0.5

The price of good B increases by 4%, causing the quantity demanded of good A to decrease by 6%. The cross-price elasticity of demand is _____, and the goods are ______.

-1.5; complements

Tonya consumes 10 boxes of ramen noodles a year when her yearly income is $40,000. After her income falls to $30,000 a year, she consumes 40 boxes of ramen noodles a year. Calculate her income elasticity of demand for ramen noodles (using the midpoint method).

-4.2

If the price of a sushi roll drops from $8 to $4 and sales rise from 20 to 40 units, what is the (absolute value) of the price elasticity of demand, using the midpoint method?

1

What factors determine the price elasticity of supply?

1. Availability of inputs 2. Time

What factors determine the price elasticity of demand?

1. The availability of close substitutes 2. Whether the good is a necessity or a luxury 3. The share of income spent on the good 4. The length of time elapsed since the price change 5.

When the patent expires on a brand-name drug and five generic drugs come on the market, what happens to elasticity of demand?

It rises.

The elasticity of demand for eggs has been estimated to be 0.1. If egg producers raise their prices by 10 percent, what will happen to their total revenue?

It will increase

If a fashionable clothing store raised its prices by 25%, what does that tell you about the store's estimate of the elasticity of demand for its products?

They think it's inelastic

For ________, cross-price elasticity of demand is negative.

complements

Many substitutes? Switching brands when prices change is easy, so demand is ________.

elastci

A demand curve is ________ when an increase in price reduces the quantity demanded a lot

elastic

A supply curve is ________ if a rise in price increases the quantity supplied a lot.

elastic

If production can be increased cheaply, then the supply curve will be ________.

elastic

The demand for luxuries is ________.

elastic

When demand is ________, the quantity effect dominates the price effect.

elastic

When demand is elastic, total revenue will ________ with a price increase.

fall

Quantity effect of price increase

fewer units sold

If two linear demand (or supply) curves run through a common point, then at any given quantity, the curve that is ________ is more elastic

flatter

For income-elastic goods income elasticity is ________.

greater than 1

The cross-price elasticity of demand

measures how sensitive the quantity demanded of good A is to the price of good B

Long-run price elasticity of supply is usually ________ than the short-run elasticity.

higher

Price effect of price increase

higher price for each unit sold

A supply curve is ________ if sellers change quantity supplied just a little in response to price change

inelastic

Fewer substitutes make it harder for consumer to adjust Q when P changes, so demand is ________.

inelastic

If increased production is very expensive, then the supply curve will be ________.

inelastic

The demand for necessities is ________.

inelastic

When demand is _________, the price effect dominates the quantity effect.

inelastic

When the same increase in price reduces the quantity demand just a little, then the demand curve is ________.

inelastic

We are ________ sensitive to price changes when the good feels cheap.

less

Less time to adjust means ________.

lower elasticity

Income elasticity of demand

measures how sensitive the quantity demanded of a good is to changes in income.

For normal goods, income elasticity is ________.

positive

For income-inelastic goods, income elasticity is ________.

positive but less than 1

Total revenue

price times quantity demanded (sold)

When demand is inelastic, total revenue will ________ with a price increase.

rise

For ________, cross-price elasticity of demand is positive.

substitutes

When |ED| > 1

the demand curve is elastic

When |ED| < 1

the demand curve is inelastic

When |ED| = 1

the demand curve is unit elastic

When demand is ________, the quantity effect equals the price effect.

unit-elastic

A good can have a price elasticity as low as ________ or as high as ________.

zero; infinity