Ch 6 Quiz and Vocab

If the price elasticity of supply is .5, a 10 percent increase in price will cause a

5 percent increase in quantity supplied

relationship between total revenue and elasticity

If demand is elastic (e>1), a rise in price lowers total revenue. (Price and total revenue move in opposite directions). If demand is unit elastic (e=1), a rise in price leaves total revenue unchanged. If demand is inelastic (e<1), a rise in price increases total revenue (price and total revenue move in the same direction.)

substitute

a good that can be used in place of another good

luxury good

a good that has an income elasticity greater than 1

necessity

a good that has an income elasticity less than 1

normal good

a good whose consumption increases with an increase in income

If the price elasticity of demand for a good is inelastic, a price change causes

a less than proportionate change in quantity demanded

If elasticity of demand is greater than 1

a rise in price lowers total revenue

If an economist observed that higher hot dog prices lead to an increase in the demand for chili, she most likely would conclude that

chili and hot dogs are compliments

For substitutes

cross price elasticity of demand can be any positive value

For complements

cross-price elasticity of demand is negative

inferior good

good whose consumption decreases when income increases

complement

goods that are used in conjunction with other goods

For normal goods, income elasticity is

greater than 0

If quantity demanded does not change when the price changes, the demand

is perfectly inelastic

In general, the greater elasticity, the

larger the responsiveness of quantity to changes in price

Cross-price elasticity of demand is defined as the

percentage change in demand divided by percentage change in the price of another good

Income elasticity if defined as the

percentage change in demand divided by the percentage change in income

Demand is said to be elastic when the

percentage change in quantity demanded is greater than the percentage change in price

Price elasticity of demand is the

percentage change in quantity of a good demanded divided by the percentage change in the price of that good

Supply is said to be inelastic when the

percentage change in quantity supplied is less than the percentage change in price

The price elasticity of supply is the

percentage change in the quantity supplied divided by the percentage change in price

If supply is highly elastic and demand shifts to the right

price will hardly change at all, quant will rise significantly

A price elasticity of demand for a good or service of 1.8 tells us that

quantity demanded falls by 1.8 percent when price rises by 1 percent

If the amount of land supplied remains the same even when the price of land increases, the

supply o land must be perfectly inelastic

Income elasticity of demand

the percentage change in demand divided by the percentage change in income

Cross-price elasticities of demand

the percentage change in demand divided by the percentage change in the price of a related good

Price elasticity of demand

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

elastic

the percentage change in quantity is greater than the percentage change in price (E>1)

inelastic

the percentage change in quantity is less than the percentage change in price (E<1)

Price elasticity of supply

the percentage change in quantity supplied divided by the percentage change in price

Which of the following statements is true about a downward slopping demand curve that is a straight line

the slope remains the same, but elasticity falls as you move down the demand curve

Price discrimination

to charge different prices to different individuals or groups of individuals