Microeconomics - Chapter 5: Elasticity and Its Application

midpoint method

(Q2 - Q1) / [(Q2 + Q1) / 2] price elasticity of demand = ------------------------- (P2 - P1) / [(P2 + P1) / 2]

The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the price elasticity of demand is a. 1/5. b. 1/2. c. 2. d. 5.

b. 1/2.

A linear, downward-sloping demand curve is a. inelastic b. unit elastic. c. elastic. d. inelastic at some points, and elastic at others.

d. inelastic at some points, and elastic at others.

perfectly elastic supply

the supply curve is horizontal; very small changes in the price lead to very large changes in the quantity supplied

perfectly inelastic supply

the supply curve is vertical; the quantity supplied is the same regardless of the price

determinants of the price elasticity of demand

• availability of close substitutes • necessities versus luxuries • definition of the market • time horizon

total revenue

the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold P x Q

perfectly elastic demand

the demand curve is horizontal; very small changes in the price lead to huge changes in the quantity demanded

perfectly inelastic demand

the demand curve is vertical; regardless of the price, the quantity demanded stays the same

income elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in consumers' income, computed as the percentage change in quantity demanded divided by the percentage change in income (percentage change in quantity demanded) ------------------------------------------------- (percentage change in income)

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price (percentage change in quantity demanded) ------------------------------------------------- (percentage change in price)

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in price of the second good (percentage change in quantity demanded of good 1) --------------------------------------------------- (percentage change in the price of good 2)

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price (percentage change in quantity supplied) ------------------------------------------------- (percentage change in price)

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

A life-saving medicine without any close substitutes will tend to have a. a small elasticity of demand. b. a large elasticity of demand. c. a small elasticity of supply. d. a large elasticity of supply.

a. a small elasticity of demand.

An increase in the supply of a good will decrease the total revenue producers receive if a. the demand curve is inelastic. b. the demand curve is elastic. c. the supply curve is inelastic. d. the supply curve is elastic.

a. the demand curve is inelastic.

Over time, technological advance increases consumers' incomes and reduces the price of smartphones. Each of these forces increases the amount consumers spend on smartphones if the income elasticity of demand is greater than ________ and if the price elasticity of demand is greater than ________. a. zero, zero b. zero, one c. one, zero d. one, one

b. zero, one

The ability of firms to enter and exit a market over time means that, in the long run, a. the demand curve is more elastic. b. the demand curve is less elastic. c. the supply curve is more elastic. d. the supply curve is less elastic.

c. the supply curve is more elastic.

unit elasticity in demand

the elasticity is exactly 1; the percentage change in quantity equals the percentage change in price

inelastic demand

the quantity demanded responds only slightly to changes in the price; the elasticity is less than 1; points with a low price and high quantity

elastic demand

the quantity demanded responds substantially to changes in the price; the elasticity is greater than 1; points with a high price and low quantity

inelastic supply

the quantity supplied responds only slightly to changes in the price

elastic supply

the quantity supplied responds substantially to changes in the price

how total revenue changes when price changes

• When demand is inelastic (a price elasticity less than 1), price and total revenue move in the same direction: If the price increases, total revenue also increases. • When demand is elastic (a price elasticity greater than 1), price and total revenue move in opposite directions: If the price increases, total revenue decreases. • If demand is unit elastic (a price elasticity exactly equal to 1), total revenue remains constant when the price changes.