Ch 4 Flashcards
___ is a measure of how much consumers and producers will respond to a change in market conditions.
Elasticity
How is price elasticity of demand calculated?
(% change in Quantity Demanded) / (% change in Price)
Name the 5 determinants of price elasticity of demand.
- Availability of substitutes
- Degree of necessity
- Cost relative to income
- Adjustment time
- Scope of the market
Describe the demand curve of a perfectly elastic good.
Horizontal line
Describe the demand curve of a perfectly inelastic good.
Vertical line
___ is the amount that a firm receives from the sale of goods/services.
Total Revenue
When price increases, the ___ describes the decrease in total revenue from selling less units.
Quantity effect
When price increases, the ___ describes the increase in total revenue from receiving a higher price per unit.
Price effect
For an elastic good, an increase in price will ___ total revenue, while for an inelastic good, an increase in price will ___ total revenue.
decrease; increase
Demand tends to be more ___ when price is high and more ___ when price is low.
elastic; inelastic
Maximum total revenue occurs when demand is…
A. Elastic
B. Inelastic
C. Unit-elastic
C
___ describes the size of the change in quantity supplied of a good/service when price changes.
Price Elasticity of Supply
How is price elasticity of supply calculated?
(% change in quantity supplied) / (% change in price)
Price elasticity of supply is always ___ zero.
greater than
Price elasticity of demand is always ___ zero.
Less than
Name the 3 factors affecting suppliers’ ability to expand production.
- Availability of inputs
- Flexibility of production process
- Adjustment time
___ describes how much demand changes when the price of a different good changes.
Cross-price elasticity of demand
How is cross-price elasticity of demand calculated?
(% change in quantity of Good A demanded) / (% change in Price of Good B)
When is cross-price elasticity of demand postive/negative?
- Positive for substitutes
- Negative for complements
___ describes how much demand changes in response to a change in consumers’ incomes.
Income Elasticity of Demand
How is income elasticity of demand calculated?
(% change in quantity demanded) / (% change in income)
When is income elasticity of demand positive/negative?
- Negative for inferior goods
- Between 0 and 1 for necessities
- Greater than 1 for luxuries
