Chap. 4 - Elasticity Flashcards
What is the profit equation? What is the equation for Total Revenue?
Profit = Total Rev. - Total Cost TR = Price * Quantity
What is price/demand elasticity?
It measures how sensitive people are to price changes; the percentage change in quantity demanded divided by the percentage change in the price of the good.
What is the difference between using arc/midpoint elasticity formula, and point elasticity?
Arc elasticity is used when computing elasticity over a range, from A to B, and using the average quantity and average price. Point elasticity is used for relatively small changes in price and quantity, calculus is used in this application.
When consumers are relatively responsive to a price change, we say that demand is _____. When the change in quantity demanded by consumers is relatively small in response to a price change, we say that demand is ______.
Elastic, Inelastic
When looking at the demand of goods or services, what are the factors that determine how much the quantity demanded changes as the price changes?
If the percentage change in quantity demanded is greater than the percentage change in price, the elasticity is greater than one and the good is classified as elastic, meaning the percentage change in quantity demanded is relatively responsive to the percentage change in price. An elasticity of demand less than one is classified as inelastic, meaning the percentage change in quantity demanded is relatively unresponsive to the percentage change in price.
Elasticity that is greater than one is ____.
Elasticity that is less than one is _____.
Elasticity that is equal to one is _____.
Elastic, Inelastic, Unitary Elastic
If operating in the Elastic portion of the demand curve and there is a price increase (decrease), Total Revenue will…?
Total Revenue will fall (rise). The percentage change in price is much smaller than the percentage change in quantity.
What is the arc or midpoint formula for elasticity?
((Q2-Q1)/(Q2+Q1)/2)/((P2-P1)/(P2+P1)/2)
If the percentage change in quantity is equal to the percentage change in price, demand is said to be ______? And in this case a price increase or decrease _____ ___ change Total Revenue.
Unit Elastic, Does Not
If operating in the Inelastic portion of the demand curve and there is a price increase (decrease), Total Revenue will…?
Total Revenue will rise (fall). The percentage change in price is much larger than the percentage change in quantity.
price changes then the elasticity of demand is zero and the demand curve is vertical. When an individual is insulin dependent and consumes the same amount of insulin each day regardless of the price, her demand would be?
Perfectly Inelastic. This is a vertical demand curve.
An individual grain farmer in a competitive market that can sell all that he can produce at the going market price. But if he tries to raise the price, the quantity demanded for the good goes to zero, his demand would be?
Perfectly Elastic. This is a horizontal demand curve.
You determine that the product you are producing and selling has an elasticity of -7. If you were to decrease the price by one percent what happens with quantity demanded?
A one percent decrease in the price of the good would cause a 7% increase in the quantity demanded. Remember it is elastic, and a small percentage change in price results in a much larger percentage change in quantity demanded.
You determine that the product you are producing and selling has an elasticity of -.161. If you were to increase the price by one percent what happens with quantity demanded?
A one percent increase in the price of the good would cause a .161% increase in the quantity demanded. Remember it is inelastic, and a small percentage change in price results in an even smaller percentage change in quantity demanded.
What are the determinants of elasticity?
Close substitutes, Percent of Income, Luxury or Necessity, Time, and Market Definition