chapter 6 econ key terms

Midpoint method

Replaces the usual definition of percent change in a variable, X, with a slightly different definition

example for complement good

peanut butter up, jelly down

a reduction in price and increases total revenue

price elastic

an increase in price and reduces total revenue

price elastic

total revenue moves in the direction in the quantity change

price elastic

a reduction in price and reduction in revenue

price inelastic

an increase in price and increase in revenue

price inelastic

total revenue moves in the direction of the price change

price inelastic

Complement goods

quantity demanded of one good falls when the price of another rises - negative

substitute goods

quantity demanded of one good rises when the price of another rises - positive

normal good, income elastic

quantity demanded rises when income rises, and more rapidly than income --> greater than 1

normal good, income inelastic

quantity demanded rises when income rises, and more rapidly than income --> positive, less than 1

Perfectly elastic demand

the case in which any price increase will cause the quantity demanded to drop to zero; the demand curve is a horizontal line.

Perfectly elastic supply

the case in which even a tiny increase or reduction in the price will lead to very large changes in the quantity supplied, so that the price elasticity of supply is infinite; the perfectly elastic supply curve is a horizontal line.

Income elastic demand

the case in which the income elasticity of demand for a good is greater than 1.

Income inelastic demand

the case in which the income elasticity of demand for a good is positive but less than 1.

When the price of fountain pens decreases from $3 to $1, the quantity of fountain pens demanded increases from 100 to 200 pens. What is the price elasticity of demand, obtained using the midpoint method?

.67

The price of gasoline rises 5% and the quantity of gasoline purchased falls 1%. The price elasticity of demand is equal to _____, and demand is described as _____.

0.2; inelastic

The state of Texas recently saw a gasoline price increase of 5%, which brought about a fall in the quantity of gasoline purchased of 1%. The price elasticity of demand is equal to _____, and demand is described as _____.

0.2; inelastic

Each month, Evelyn spends exactly $50 on frappuccinos, regardless of the price. Evelyn's price elasticity of demand for frappuccinos is:

1

Suppose at $10 the quantity demanded is 100. When the price falls to $8, the quantity demanded increases to 130. The price elasticity of demand (using the midpoint formula) between $10 and $8 is approximately:

1.17

A restaurant manager has estimated that the price elasticity of demand for meals is 2. If the restaurant increases menu prices by 5%, she can expect the number of meals sold to decrease by _____ and total revenue to _____.

10%; fall

An attorney supplies 40 hours of work per week when her fee is $100 per hour but supplies 60 hours of work per week when her fee rises to $120 per hour. Using the midpoint formula, her elasticity of supply is equal to:

2.2

As described in the article entitled "What Happened When the U.S. Got Rid of Guest Workers? Farms Used Lees Labor," in 1964 the Johnson administration terminated the "bracero" program that previously allowed nearly one half million seasonal farm workers per year in the United States. This termination of the program had the economic effect of

Decreasing the total income paid to unskilled U.S. workers in California (and other states with the heaviest concentration of braceros) reflecting an elastic demand for unskilled labor.

If a good has a price-inelastic demand, then which statement is NOT likely to be characteristic of this good?

It has many substitutes.

Elastic demand

When the price elasticity of demand is greater than 1

Inelastic demand

When the price elasticity of demand is less than 1

If the price elasticity of demand for basketball shoes is 4:

a 20% decrease in the price of shoes will increase quantity demanded by 80%.

If the price elasticity of demand for cotton is 0.5, and the income elasticity of demand for cotton is 0.4:

a 50% increase in income will increase the quantity demanded of cotton by 20%.

inferior good

a good that consumers demand less of when their incomes increase quantity demanded falls when income rises --> negative

Income elasticity of demand

a measure of how much the demand for a good is affected by changes in consumers' incomes. It allows us to determine whether a good is a normal or inferior good as well as to measure how intensely the demand for the good responds to changes in income.

cross-price elasticity of demand

as the ratio of the percent change in the quantity demanded of one good to the percent change in the price of the other. Calculated using midpoint method

If the cross elasticity of demand between cheese and yogurt is positive, then:

cheese and yogurt are complements.

example for substitute good

coke up, pepsi up

The price of matcha tea increases by 10%, and as a result, Cassandra purchases fewer biscotti. For Cassandra, matcha tea and biscotti are:

complements.

A demand curve that is perfectly inelastic is:

vertical.

It is very easy for Evelyn to find inexpensive inputs for her business. Evelyn's supply is therefore likely to be:

elastic

The price elasticity of demand for snowboarding lessons at Jay Peak resort in Vermont is greater than 1. This means that the demand for snowboarding lessons is _____.

elastic

If the income elasticity of electric cars is positive:

electric cars are a normal good.

The long-run price elasticity of supply of crude oil is _____ the short-run price elasticity of supply of crude oil.

greater than

A perfectly elastic supply curve is:

horizontal

An increase in the consumer surplus in the market for milkshakes may result from a(n) _____ in the _____ of milkshakes.

increase; supply

Perfectly inelastic supply

the case in which the price elasticity of supply is zero, so that changes in the price of the good have no effect on the quantity supplied; the perfectly inelastic supply curve is a vertical line.

Perfectly inelastic demand

the case in which the quantity demanded does not respond at all to changes in the price; the demand curve is a vertical line.

Price elasticity of supply

the ratio of the percent change in quantity demanded to the percent change in price as we move along the demand curve.

Price elasticity of demand

the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve.

Which factor does NOT determine the price elasticity of demand?

the slope of the supply curve

Total revenue

the total value of sales of a good or service, equal to the price multiplied by the quantity sold

a reduction in price and no change in total revenue

unit price elastic

an increase in price and no change in total revenue

unit price elastic

total revenue does not change as price changes

unit price elastic

Unit elastic demand

where the price elasticity of demand is exactly 1