Chapter 5

the good is a necessity

A good tends to have a small price elasticity of demand if

inelastic at some points and elastic at others

A linear, downward-sloping demand curve is

Price, greater

An increase in a good's price reduces the total amount consumers spend on the good of the _ elasticity of demand is _ than one

The demand curve is inelastic

An increase in the supply of grain will reduce the total revenue grain producers receive if

more, smaller

Because the demand curve for oil is _ elastic in the long run; OPEC's reduction in the supply of oil had a _ impact on the price in the long run than it did in the short run

Vertical

If the price elasticity of supply is zero, the supply curve is

1) In the extreme case of zero elasticity, supply is perfectly inelastic and the supply curve is vertical 2) At the opposite extreme, supply curve is perfectly elastic. This occurs as the price elasticity of supply approaches infinity and the supply curve becomes horizontal, meaning that very small changes in the price lead to very large changes in the quality supplied.

Know how to identify perfectly elastic and perfectly inelastic curves

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

Know the basic definition of elasticity

The supply curve is more elastic

The ability of firms to enter and exit a market over time means that, in the long run,

Lilliput has lower income, and the income elasticity of demand is 0.5

The citizens of Lilliput spend a higher fraction of their income on food than do the citizens of Brobdingnag. The reason could be that

1/2

The price of a good rises from $16 to $24, and the quantity supplied rises from 90 to 110 units. Calculated with the midpoint method, the price elasticity of supply is

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

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

Elasticity

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

Each farmer is a price taker

In competitive markets, farmers adopt new technologies that will eventually reduce their revenue because

Total revenue

the amount a firm receives for the sale of its output

1) The price elasticity of demand measures how much the quantity demanded responds to a change in price. Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price. 2) The income elasticity of demand measures how the quantity demanded changes as consumer incomes changes. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. 3) The cross-price elasticity of demand measures how the quantity demanded of one good responds to a change in the price of another good. It is calculated as the percentage change in quantity demanded of good one divided by the percentage change in the price of good two. 4) The price elasticity of supply measures how much the quantity supplied responds to changed in the price. Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the price. Supply is said to be inelastic if the quantity supplied responds only slightly to changes in the price

Be able to explain demand elasticity, income elasticity, cross price elasticity and supply elasticity

1) In most markets, a key determinant of the price elasticity of supply is the time being considered 2) Supply is usually more elastic in the long run than in the short run 3) Over short periods of time, firms cannot easily change the size of their factories to make more or less of a good 4) Thus, in the short run, the quantity supplied is not very responsive to changes in the prices 5) Over linger periods of time, firms can build new factories or close old ones 6) In addition, new firms can enter a market, and old firms can exit 7) This, in the long run, the quantity supplied can respond substantially to price changes

Know the difference between between long run and short run elasticity

1) When studying changes in supply or demand in a market, one variable we often want to study is total revenue, the amount paid by buyers and received by sellers of a good 2) The impact of a price change in total revenue (the product of price and quantity) depends on the elasticity of demand 3) When demand is inelastic (a price elasticity less than one), price and total revenue move in the same direction: if the price increases, total revenue also increased 4) When demand is elastic (a price elasticity greater than one), pride and total revenue move in opposite directions: if the price increases, total revenue decreases 5) if demand is unit elastic (a price elasticity exactly equal to one), total revenue remains constant when the price changes

Know the relationship between changes in total revenue and elasticity

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 the price of the second good

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