Chapter 3.1 Flashcards
Price elasticity of demand
A measure of the responsiveness of the quantity of a good demanded to changes in its price
If quantity demanded is highly responsive to a change in price, demand is
Elastic
If quantity demanded is not very responsive to a change in price, demand is
Inelastic
Formula to calculate PED
Percentage change in quantity demanded over percentage change in price
When is demand price inelastic?
When PED <1
When is demand price elastic?
When PED >1
When is demand unit elastic?
When PED =1
When is demand perfectly inelastic?
When PED =0
When is demand perfectly elastic?
When PED = infinity
How do you tell which demand curve is more elastic? What are the assumptions?
The flatter one is more elastic and the steeper one is more inelastic, only when the curves intersect
On any downward-sloping straight line demand curve, what part of it is price elastic?
When the price is high and quantity is low
On any downward-sloping straight line demand curve, what part of it is price inelastic?
When the price is low and quantity is large
On a downward-sloping straight line demand curve, when is demand unit elastic?
At the midpoint
Why shouldn’t an entire demand curve be called elastic or inelastic?
Elasticity is only relative to certain portions of the demand curve
Determinants of price elasticity of demand
Number and closeness of substitutes
Necessities vs luxuries
Length of time
Proportion of income spent on a good
Necessities
Goods or services considered to be essential or necessary in our lives
Luxuries
Goods or services that are not necessary or essential
Total revenue
The amount of money received by firms when they sell a good or service
When demand is elastic, an increase in price causes a __ in total revenue while a decrease in price cause a __ in total revenue
fall, rise
When demand is inelastic, an increase in price causes an __ in total revenue while a decrease in price causes a __ in total revenue
Increase, fall
When demand is unit elastic, what is the effect of a change in price on total revenue?
There is no effect
The lower the price of elasticity of demand for taxed goods, the __ the government tax revenues
Greater
Primary commodity
A good that comes directly from the use of natural resources
Manufactured product
A good that is produced by labor usually working together with capital as well as raw materials
Why do many primary commodities have a relatively low PED?
Because they are necessities and have no substitutes
Why are the PED of manufactured products relatively high?
They usually have substitutes
