Micro Chapter 6

Inferior Good

A negative income elasticity coefficient. Retread tires, cabbage, long distance bus tickets, used clothing, and muscatel wine are likely candidates, Consumers decrease their purchases of these as incomes rise.

Complementary Goods

Products and services that are used together. When the price of one falls, the demand for the other increases and conversely.

time

a determinant of price elasticity of demand

short run

a period of time too short to change plant capacity but long enough to use the fixed sized plant more or less intensively.

Long Run

a time period long enough for firms to adjust their plant sizes and for new firms to enter (or existing firms to leave) the industry.

own-price elasticity of demand

b

Unit elasticity

demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or quantity supplied is equal to the percentage change in price.

inelastic Demand

if a specific percentage change in price produces a smaller percentage change in quantity demanded, the demand is inelastic.

substitute goods

if cross elasticity of demand is positive, meaning that sales of X move in the same direction as a change in the price of Y, then X and Y are _______ goods.

Normal good

income elasticity coefficient is positive,e meaning that more of them are demanded as incomes rise.

Market Period

length of time over which producers are unable to respond to a change in price with a change in quantity supplied.

perfectly inelastic demand

product or resource demand in which price can be of any amount at a particular quantity of the product or resource that is demanded; when the quantity demanded does not respond to a change in price; graphs as a vertical supply curve.

Perfectly elastic demand

product or resource demand in which quantity demanded can be of any amount at a particular product or resource price; graphs as a horizontal demand curve.

Elastic demand

product or resource demand whose price elasticity of demand is greater than 1, so that any given percentage change in price leads to a larger percentage change in quantity demanded. as a result, quantity demanded is relatively sensitive to price.

Independent goods

products or services for which there is little or no relationship between the price of one and the demand for the other. when the price of ne rises or falls, the demand for the other tends to remain constant.

A determinant of Price Elasticity of demand

substitutability, proportion of income, luxuries vs. necessities, time.

price elasticity of supply

the ratio of the percentage change in quantity supplied of a product or resource to the percentage change in its price; a measure of the responsiveness of producers to change in the price of a product or resource.

Income elasticity of demand

the ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income; measures the responsiveness of consumer purchases to income changes.

Cross-price elasticity of demand

the ratio percentage change in quantity demanded of one good to the percentage change in the price of some other good. a positive coefficient indicates the two products are substitute goods; a negative coefficient indicates they are complementary goods

Midpoint formula

used for calculating elasticity. simply averages the two prices and the two quantities as the reference points for computing the percentages.