Econ Module 2.5, 2.6, 2.7, & 2.8

Negative Income Elasticity of Demand

Inferior Good (As income increases, QD decreases)

revenue

Price x Quantity

Positive Cross Price Elasticity of Demand

Substitutes (As the Price of one good increases, the Demand for the second good increases) The 2 goods are in Competitive Demand.

specific brands can be substituted

easier than brad categories and have great elasticity

If demand is _____, a higher price yields _____ total revenue.

elastic; lower

availability of substitutes

fewer substitutes means less elastic demand more substitutes means more elastic demand

elastic demand curve is

flat because quantity demand is responsive

you cannot live with out necessities so they

have less elasticity

perfectly elastic 2

if price increases at all you will buy the other option

elastic you lower prices to

increase profit

inelastic you rise prices to

increase profit

since consumers like to search for the best deal demand

is more elastic

With fewer substitutes, demand tends to be

less elastic

grater than 1 income elasticity of demand

luxury good

price elasticity of demand

measures how responsive buyers are to price changes

If a consumer has more time to search for a low-cost alternative for an item, the demand curve for that item will be:

relatively more elastic

If an item is a necessity rather than a luxury, its demand curve will be:

relatively steep.

when demand is inelastic a decrease in summerly increases

revenue

inelastic demand curve is

steep because quantity demanded is unresponsive

elasticity demands all on

substitutes

income elasticity of demand

% change in quantity demanded / % change in income

cross-price elasticity of demand

% change in quantity of A demanded / % change in price of B

Last week, Michelle spent $30$30 on caviar. Today, Michelle still spends $30 on caviar even though its price has doubled. What is Michelle's price elasticity of demand for caviar?

1

Negative Cross Price Elasticity of Demand

Complements (As the Price of one good increases, the Demand for the second good decreases) The 2 goods are in Joint Demand.

Which of the following statements about the price elasticity of demand is correct?

Demand is more elastic in the long run than it is in the short run.

Which of the following could explain why the demand for table salt is inelastic?

Households devote a very small portion of their income to salt purchases.

Positive Income Elasticity of Demand

Normal Good (As income increases, QD increases)

elastic means a modest price rise will lead to

a large decline in quantity

inelastic means a large price rise will lead to

a modest decline in quantity

we use ___________ value to focus on magnitude of Ep

absolute

The demand curve for one particular brand of cough syrup will _____ the demand curve for cough syrup as a general category.

be more elastic than

inelastic demand

buyers are not very responsive to demand

elastic demand

buyers are super responsive to price changes

If the price of steel increases drastically, the quantity of steel demanded by the building industry will fall significantly over the long run because

buyers of steel are more sensitive to a price change if they have more time to adjust to the price change.

perfectly elastic

curve is horizontal and Ep is infinite

perfectly inelastic

curve is vertical and Ep is 0

share of the budget

demand for a good is more elastic when the good takes a lot of the budget

definition of the market

demand for a particular gas station will be more elastic than the demand for all gas stations

The cross-price elasticity of demand measures how responsive the:

demand for one good is to a change in the price of another good.

Demand for soda outside an airport is more elastic than inside of the airport because:

more choices makes demand more elastic.

Demand for a luxury item tends to be

more elastic

Demand for an item that uses a large portion of your budget tends to be

more elastic

Over longer periods of time, demand tends to be

more elastic.

more competing products means

more substitutes and greater elasticity

perfectly inelastic 2

no matter change in price they will always buy the product

responsiveness of demand changes due to

opportunity cost because Ep is all about how good the next best alternative is

demand gets more elastic

over time

inelastic 2

price change does not change quantity demanded a lot

Income elasticity of demand measures how responsive the:

quantity demanded of a good is to changes in income.

If a certain item has many substitutes, its demand curve will be:

relatively flat.

You have been appointed head of marketing for Barry's Younique Yachts. Barry, the CEO, is interested in determining whether offering his yachts at a lower price would increase the firm's revenue. He asks you for advice.

that he should reduce his prices. Yachts are luxury goods and therefore exhibit a high price elasticity of demand. Thus, reducing prices would increase revenue.

adjustment time

the longer the time horizon the more elastic the demand

The slope of a demand curve is not used to measure the price elasticity of demand because

the measurement of slope is sensitive to the units chosen for price and quantity.

need

the more a good is a necessity the more inelastic the demand will be

Two products have a cross-price elasticity of demand of 1.5. Based on this value of cross-price elasticity, which of the following products are they most likely to be?

two competing brands of soft drinks

Suppose the percent change in the quantity demanded for water for any price change is zero. The demand curve for water is _____, and the price elasticity of demand is perfectly _____.

vertical; perfectly inelastic