Micro-Economics AP Chapter 6 Vocabulary & Review
Inelastic Demand
Product or resource demand for which the price elasticity of demand is less than 1, so that any given percentage change in price leads to a smaller percentage change in quantity demanded. As a result, quantity demanded is relatively insensitive to (inelastic with respect to) price.
Perfectly Inelastic
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 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 (elastic with respect to) price.
Similar differences occur for the quantity demanded of various products when their prices change. For some products, a price change causes a substantial "stretch" of quantity demanded. When this stretch in percentage terms exceeds the percentage change in price, demand is elastic. For other products, quantity demanded stretches very little in response to the price change. When this stretch in percentage terms is less than the percentage change in price, demand is inelastic.
Similar differences occur for the quantity demanded of various products when their prices change. For some products, a price change causes a substantial "stretch" of quantity demanded. When this stretch in percentage terms exceeds the percentage change in price, demand is elastic. For other products, quantity demanded stretches very little in response to the price change. When this stretch in percentage terms is less than the percentage change in price, demand is inelastic.
Cross Elasticity
Ecd = %ΔQ.D.x/%ΔPy = -Q.D. pol/-Pslr = + (substitutes) OR +Q.D. FF/ - P bigmac = negative (complement) (pol - Polaroid)
Midpoint Formula
A method for calculating price elasticity of demand or price elasticity of supply that averages the starting and ending prices and quantities when computing percentages.
Income Elasticity
Ei = %Q.D. x/ %ΔIncome = +/+ = + Normal good OR = -/+ = inferior good
Total Revenue-Test
A test to determine elasticity of demand. Demand is elastic if total revenue moves in the opposite direction from a price change; it is inelastic when it moves in the same direction as a price change; and it is of unitary elasticity when it does not change when price changes.
Bottom line: Other things equal, when price and total revenue move in opposite directions, demand is elastic. Ed is greater than 1, meaning the percentage change in quantity demanded is greater than the percentage change in price.
Bottom line: Other things equal, when price and total revenue move in opposite directions, demand is elastic. Ed is greater than 1, meaning the percentage change in quantity demanded is greater than the percentage change in price.
Demand is _______ if a specific percentage change in price results in a larger percentage change in quantity demanded.
Demand is elastic if a specific percentage change in price results in a larger percentage change in quantity demanded.
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.
Time
Generally, product demand is more elastic the longer the time period under consideration. Consumers often need time to adjust to changes in prices.
Substitutability
Generally, the larger the number of substitute goods that are available, the greater the price elasticity of demand.
If a specific percentage change in price produces a smaller percentage change in quantity demanded, demand is _________.
If a specific percentage change in price produces a smaller percentage change in quantity demanded, demand is inelastic.
If demand is elastic, a decrease in price will ________ total revenue.
If demand is elastic, a decrease in price will increase total revenue.
If demand is elastic, a price increase will ______ total revenue. The revenue gained on the higher-priced units will be more than offset by the revenue lost from the lower quantity sold.
If demand is elastic, a price increase will reduce total revenue. The revenue gained on the higher-priced units will be more than offset by the revenue lost from the lower quantity sold.
If demand is inelastic, a price increase will ________ total revenue. So, other things equal, when price and total revenue move in the same direction, demand is inelastic.
If demand is inelastic, a price increase will increase total revenue. So, other things equal, when price and total revenue move in the same direction, demand is inelastic.
Luxuries versus Necessities
In general, the more that a good is considered to be a "luxury" rather than a "necessity," the greater is the price elasticity of demand.
In summary: Elastic demand displays considerable "quantity stretch" (as with the Ace bandage). Inelastic demand displays relatively little "quantity stretch" (as with the rubber tie-down). And through extension: Perfectly elastic demand has infinite quantity stretch. Perfectly inelastic demand has zero quantity stretch.
In summary: Elastic demand displays considerable "quantity stretch" (as with the Ace bandage). Inelastic demand displays relatively little "quantity stretch" (as with the rubber tie-down). And through extension: Perfectly elastic demand has infinite quantity stretch. Perfectly inelastic demand has zero quantity stretch.
In that extreme situation, where a price change results in no change whatsoever in the quantity demanded, economists say that demand is _________ ____________.
In that extreme situation, where a price change results in no change whatsoever in the quantity demanded, economists say that demand is perfectly inelastic.
In the inelastic range of demand curve D, lowering the price decreases total revenue. Raising the price boosts total revenue. In both cases, price and total revenue move in the same direction, confirming that demand is inelastic.
In the inelastic range of demand curve D, lowering the price decreases total revenue. Raising the price boosts total revenue. In both cases, price and total revenue move in the same direction, confirming that demand is inelastic.
Proportion of Income
Other things equal, the higher the price of a good relative to consumers' incomes, the greater the price elasticity of demand.
Other things equal, when price changes and total revenue remains constant, demand is unit-elastic (or unitary). Ed is 1, meaning the percentage change in quantity equals the percentage change in price.
Other things equal, when price changes and total revenue remains constant, demand is unit-elastic (or unitary). Ed is 1, meaning the percentage change in quantity equals the percentage change in price.
The case separating elastic and inelastic demands occurs where a percentage change in price and the resulting percentage change in quantity demanded are ___ ____.
The case separating elastic and inelastic demands occurs where a percentage change in price and the resulting percentage change in quantity demanded are the same.
The importance of elasticity for firms relates to the effect of price changes on total revenue and thus on profits (= total revenue minus total costs).
The importance of elasticity for firms relates to the effect of price changes on total revenue and thus on profits (= total revenue minus total costs).
Price Elasticity of Demand
The ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price a measure of the responsiveness of buyers to a change in the price of a product or resource.
The responsiveness (or sensitivity) of consumers to a price change is measured by a product's...
The responsiveness (or sensitivity) of consumers to a price change is measured by a product's Price Elasticity of Demand.
Total Revenue (TR)
The total number of dollars received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.
In the case of unit elasticity, an increase or a decrease in price leaves total revenue __________.
case of unit elasticity, an increase or a decrease in price leaves total revenue unchanged.