Micro Chapter 6

What is the formula for % change in X?

% change in X = change in X / Average value of X

What is the formula for % change in price?

% change in price = change in price/initial price

What is the formula for price elasticity in demand?

% change in quantity demanded / % change in price

What is the formula for % change in quantity demanded?

% change in quantity demanded = change in quantity demanded/initial quantity demanded

What are four factors that determine the price elasticity of demand?

1. whether close substitutes are available 2. whether the good is a necessity or a luxury 3. share of income spent on the good 4. time

What does a negative cross-price elasticity of demand mean?

A negative cross-price elasticity of demand means that the two involved goods are complements.

What does a positive cross-price elasticity of demand mean?

A positive cross-price elasticity of demand means that the two involved goods are substitutes

What is the formula for average value of X?

Average value of X = (starting value of X + final value of X)/ 2

What is the formula for cross-price elasticity of demand?

Cross Price elasticity of demand = % change in quantity of A demanded / % change in price of B

When is demand elastic?

Demand is elastic if the price elasticity of demand is greater than 1.

When is demand inelastic?

Demand is inelastic if the price elasticity of demand is less than 1.

When is a demand perfectly elastic?

Demand is perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line.

When is demand perfectly inelastic?

Demand is perfectly inelastic when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line.

When is demand unit-elastic?

Demand is unit-elastic if the price elasticity of demand is exactly 1.

What is the income elasticity of demand?

Income elasticity of demand = the % in quantity of a good demanded when a consumer's income changes / % change in the consumer's income.

What is the formula for the price elasticity of supply?

Price elasticity of supply = % change in quantity supplied / % change in price

What are two factors that determine the price elasticity of supply?

The availability of inputs and time

What is the cross-price elasticity of demand?

The cross-price elasticity of demand between two goods measures the effect of the change in one good's price on the quantity demanded of the other good.

What is the midpoint method?

The midpoint method is a technique for calculating the percent change. In this approach, we calculate changes in a variable compared with the average, or midpoint, of the starting and final values.

What is the price elasticity of demand?

The price elasticity of demand is the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve (dropping the minus sign).

What is the price elasticity of supply?

The price elasticity of supply is a measure of the responsiveness of the quantity of a good supplied to the price of that good.

What effect does a high availability of inputs have on price elasticity?

The price elasticity of supply tends to be large when inputs are readily available and can be shifted into and out of production at a relatively low cost. It tends to be small when inputs are difficult to obtain.

What effect does a large amount of time have on price elasticity?

The price elasticity of supply tends to grow larger as producers have more time to respond to a price change. This means that the long-run price elasticity of supply is often higher than the short-run elasticity.

When is there perfectly elastic supply?

There is perfectly elastic supply when 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. A perfectly elastic supply curve is a horizontal line.

When is there perfectly inelastic supply?

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

What does an increase in price do to total revenue if a good is unit-elastic?

Total revenue does not change by an increase in the price of a unit-elastic good.

What does an increase in price do to total revenue if a good is inelastic?

Total revenue is increased by an increase in the price of an inelastic good.

What does an increase in price do to total revenue if a good is elastic?

Total revenue is reduced by an increase in the price of an elastic good.

What does a negative income elasticity of demand mean?

When the income elasticity of demand is negative, the good is an inferior good; that is, the quantity demanded at any given price decreases as income increases.

What does a positive income elasticity of demand mean?

When the income elasticity of demand is positive, the good is a normal good; that is, the quantity demanded at any given price increases as income increases.