MICRO ECON FINAL PT I

When total expenditures and price are positively related, demand is

inelastic

Inferior goods

income elasticity is negative. When income rises, the Qd for these goods fall. Ex. nosebleed seats

IF INELASTIC DEMAND AND PRICE INCREASES, TOTAL REVENUE WILL _________.

increase

Elasticity of supply is always:

positive because of the law of supply. (its upward sloping)

Elastic supply curve always crosses the...

price axis (y axis)

Luxury goods

products with an income elasticity greater than 1. As income rises, Qd grows faster than income. Ex. fine wine

Market period

*is short *the output and number of firms in an industry are fixed *markets can do little to increase supply *Qd curve will be shifted, affecting price (if demand grows, price rises vice versa)

Short run

*plant capacity and number of firms in the industry cannot change *can change some variable outputs to adjust to changes in the market like the amount of labor and raw materials

Complements

CROSS ELASTICITY IS NEGATIVE. products are those goods and services that are consumed together. Two goods that ARE NOT RELATED if a cross elasticity is zero, or near zero.

Ed>1

Elastic

This demand has sensitive response to price change

Elastic demand Ed>1

Ed<1

Inelastic

The _____ is a period of time long enough for firms to alter their plant capacities and for the number of firms in the industry to change.

LONG RUN

Inelastic supply curve always cross through the...

Orgin (x)

Total Revenue=

Quantity Sold (Q) x Price (P)

The primary determinant of price elasticity of supply

Time

Ed=1

Unitary

Elastic demand

When price increases, TR decreases. When price decreases, TR increases.

Inelastic demand

When price increases, TR increases. When price decreases, TR decreases.

Unitary Elastic

When price increases, no change in TR. When price decreases, no change in TR.

Plant capacity (building another plant or expanding) is an example of (variable/fixed) input

fixed

If the price of a product with an inelastic demand (Ed<1) is increased, the:

gain in revenue from the higher price is greater than the loss in revenue from selling fewer units

Normal good

income elasticity is POSITIVE but less than 1. As income rises, Quantity demanded rises as well but not as fast as the rise in income.

A product whose consumers continue to buy even when its price goes up

inelastically demanded product

cross elasticity of demand

measures how changes in the price of one good affect the demand for other related goods percentage change in Qd of product a/ percent change in price of product b Products "a" and "b" are substitutes. ex. chicken and turkey. as the price of turkey rises, people will substitute with chicken

income elasticity of demand

measures how responsive quantity demanded is to change in income

Equation for revenue lost

old price x (quantity at old price-quantity at new price)

Equation for income elasticity of demand

percent change in Qd/ percent change in income New supply-old supply/(old supply+new supply)/2 divided by New price-old price/(old price+new price)/2 "change over average"

Elasticity of supply

percent change in quantity supplied/percent change in price slope of the supply curve is positive, the price of elasticity supply will always be a positive number

Equation for cross elasticity of demand

percentage change in Qd of product a/ percent change in price of product b Products "a" and "b" are substitutes. ex. chicken and turkey. as the price of turkey rises, people will substitute with chicken

The price elasticity of supply measures the responsiveness of quantity ______ to changes in ______.

supplied; the price of the product

When moving down along a straight-line demand curve:

the elasticity of demand changes from elastic to inelastic. (unitary is in the middle)

Long run

time long enough for firms to alter plant capacity and for the number of firms in the industry to change *the most elastic *may be horizontal

Labor is an example of a (variable/fixed) input

variable