Econ Chapter 5

Define the price elasticity of demand and the income elasticity of demand

- Price elasticity of demand is a measure of how much the quantity demanded responds to a change in price. This is measured by the % change in quantity demanded divided by the % change in price. - Income elasticity of demand is a measure of how much a quantity demanded responds to a change in consumers' income. It is represented by the % change in quantity demanded divide by the % change in income.

List and explain the four determinants of the price elasticity of demand discussed in the chapter

1. Availability of close substitutes - Items with close substitutes are more elastic (butter vs. margarine) than items without a close substitute (eggs, less elastic) 2. Necessities vs. luxuries - luxuries normally have higher elastic demands, whereas necessities tend to have inelastic demands. Calling a good a necessity or luxury ultimately lies within the buyer's control 3. Definiton of the Market - Narrowly defined markets tend to have more elastic demand while broadly defined markets tend have less elastic demand. The elasticity all depends on how we the boundaries of a market 4. Time Horizon - Items tend to have a more elastic demand over a larger timeframe. When the price of gasoline rises, eventually people will start buying more fuel efficient cars.

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 of elasticity of demand is

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Elasticity

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

if the elasticity is greater than 1, is demand elastic or inelastic? If the elasticity equals zero, is demand perfectly elastic or perfectly inelastic

If elasticity is greater than 1, the demand is elastic, meaning an increase in price results to a decrease in quantity demanded. If elasticity is equal to zero, the demand is perfectly inelastic, meaning an increase in price leaves the quantity demanded unchanged,

If a fixed quantity of a good is available, and no more can be made, what is the price elasticity of supply

If there is a set amount of beachfront land available and for the most part no more can be made, it has an inelastic supply, more specifically a perfectly inelastic supply where elasticity of supply equals 0. An increase of price of this property leaves the quantity supplied unchanged.

How is the price elasticity of supply calculated? Explain what it measures

Price elasticity of supply is calculated as the percentage change in the quantity supplied divided by the percentage change in the price. It measures how much the quantity supplied of a good responds to a change in the price of that good. It also determines whether the supply curve is steep or flat.

A storm destroys half the lava bean crop. Is this event more likely to hurt java bean farmers if the demand for java beans is very elastic or very inelastic? Explain

This storm would hurt farmers more if the demand was elastic. If demand was inelastic for their products, farmers receive greater total revenue as a group if they supply a smaller crop to the market. This would be better for the farmers if the storm destroyed half of ALL the farmer's crop rather than an individual farmer.

What do we call a good with an income elasticity less than zero

We call this type of good an inferior good. As discussed in Chapter 4, an inferior good is a product you buy more of when your income falls. Necessities have small income elasticites while luxuries normally have high income elasticities

if demand is elastic, how will an increase in price change total revenue? Explain.

When demand is elastic, an increase in price will reduce total revenue. Breaking it down, when the demand curve is elastic the extra revenue from selling at a higher price is less than the lost revenue from selling fewer units.

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

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

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

A life-saving medicine without any close substitutes will tend to have

a small elasticity of demand

A linear, downward-sloping demand curve is

inelastic at some points, and elastic at others

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

An increase in the supply of a good will decrease the total revenue producers recieve if

the demand curve is inelastic

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

the supply curve is more elastic

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 _____.

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