Chapter 3 Quantitative Demand Analysis Flashcards
own price elasticity
Own price elasticity tells you how much the demand for a product changes when you change the price of that same product.
if for example the own price elasticity of demand for a product is -2 -> that means a 10 percent increase in the products rice leads to a 20 percent decline in the quantitiy demanded for the good
Explain unitary elastic demand
Unitary elastic demand means the percentage change in price is exactly matched by the percentage change in quantity demanded.
In simple words:
- If price goes up by 10%, demand goes down by 10%
- If price drops by 5%, demand increases by 5%
What is perfectly elastic demand
It means that consumers will only buy at one price — any increase in price at all, and they’ll buy nothing.
Imagine a demand that is so sensitive that even a 1-cent price increase makes everyone walk away.
What is perfectly inelastic demand
It means people will buy the same amount no matter what the price is — even if it goes way up or way down.
In other words:
- Price ↑ a lot → quantity demanded stays the same
- Price ↓ a lot → quantity demanded still stays the same
Nothing changes how much people buy.
How does the number of close substitutes affect the elasticity of demand for a good?
The more close substitutes a good has, the more elastic its demand will be.
Why?
Because when the price of that good increases, consumers can easily switch to something similar — a substitute — instead of paying the higher price.
This means:
Even a small price increase can lead to a big drop in
quantity demanded — that’s what makes the demand
elastic.
If a good has few or no close substitutes, then people can’t easily switch when the price goes up.
So they just keep buying it, even at a higher price.
What’s the difference between a broad and a specific good?
A broadly defined good is a general category — like:
- “Food”
- “Transportation”
- “Clothing”
A specifically defined good is a narrow item within that category — like:
- “Ice cream”
- “Bus rides”
- “Nike sneakers”
Is demand more elastic for broad goods or specific goods?
✅ Demand is more elastic for specific goods
❌ Demand is more inelastic for broad goods
Why is demand for broad goods more inelastic?
Because when a good is defined broadly, it’s harder to find substitutes for the entire category.
📦 Example:
- If we say “food” becomes more expensive overall, you can’t
stop eating food.
- So the demand for food in general is inelastic — people still
have to buy it.
Why is demand for specific goods more elastic?
Because it’s easier to switch from one item to another within the broader category.
🍦 Example:
If the price of Ben & Jerry’s ice cream goes up, you can switch to store-brand ice cream.
So demand for Ben & Jerry’s is more elastic — people respond to price changes.
How does time affect the elasticity of demand?
The more time consumers have to react to a price change, the more elastic the demand becomes.
In other words:
- Short-term = Demand is more inelastic
- Long-term = Demand becomes more elastic
Example: Pizza
Today: Your favorite pizza place raises prices. You’re hungry and already decided on pizza = you still buy = inelastic
Next month: You’ve found a new spot or started cooking at home = you stop buying = elastic
Why is demand more inelastic in the short term?
Because in the short term, people don’t have time to adjust or find alternatives.
🕒 They just go with what’s available — even if the price is high.
📦 Example:
If gas prices suddenly rise today, you still need to drive to work, and you can’t change cars or move closer to your job overnight.
So in the short term, you’ll keep buying gas — that’s inelastic demand.
Why does demand become more elastic in the long term?
Because over time, people can:
1. Find substitutes
2. Change habits
3. Make bigger decisions (like changing brands, moving, or switching products)
📦 Example:
If gas prices stay high for months, you might start carpooling, taking the bus, or even buying a more fuel-efficient car.
Over time, demand for gas drops — that’s elastic demand in the long run.
What is Cross-Price Elasticity of Demand?
It measures how the demand for one good changes when the price of a different good changes.
So instead of looking at how people respond to the price of one product, we look at how two products are connected in the minds of consumers.
example is pepsi vs cola in the states
What is Income Elasticity of Demand?
It measures how much the quantity demanded of a good changes when people’s income changes.
Instead of looking at price, we’re now looking at income:
What happens to what people buy when they make more (or less) money?
What is log-linear demand
A log-linear demand is just a special way of writing a demand equation, where we apply a logarithm to quantity or sometimes to price (or both), to make the relationship easier to work with — especially when dealing with elasticities.
In regular demand, we might say:
“When price goes up, quantity demanded goes down.”
In a log-linear demand, we’re saying:
“Let’s write this relationship using logs, so we can easily measure percentage changes and elasticities.”
What is a coefficient?
A coefficient is just a number in front of a variable in an equation.
It tells you how much that variable matters — how strongly it affects the outcome.
Think of it like a multiplier.
What is Least Squares Regression?
It’s a method used to draw the best-fitting straight line through a set of data points.
This line helps us understand the relationship between two things, like:
Hours studied vs. test score
Price of a product vs. how much people buy
What is a t-statistic?
A t-statistic helps us figure out whether a number we see in data (like a coefficient in regression) is actually meaningful or if it could just be random noise.
In other words:
Is this result real, or could it just be a fluke?
What is the R-statistic or R-squared?
It tells you how well your regression line fits the data.
In plain English:
“How much of the change in the outcome can we explain with our model?”
What is the F-statistic?
The F-statistic tells you whether your overall model is useful at all.
While the t-statistic checks each variable, the F-statistic checks the whole regression model.
It basically asks:
“Are at least some of these variables helping us predict the outcome? Or is this model just noise?”
What is Linear Regression?
Linear regression is a way to draw a straight line through data to show how one thing affects another.
It helps answer questions like:
- “How does changing one variable affect another?”
What is Multiple Regression?
Multiple regression is like linear regression, but with more than one variable.
It helps you answer:
- “How do several things together affect the outcome?”
