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Microeconomics > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

When is demand elastic?

A

It is elastic when the quantity demanded is quite responsive to changes in price

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2
Q

When is demand inelastic?

A

When the quantity demand is relatively unresponsive to changes in price

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3
Q

What can be observed the more demand becomes elastic?

A

The more elastic demand, the less the change in equilibrium price and the greater the change in equilibrium quantity resulting from any given shift in the supply curve

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4
Q

When demand is elastic, who has power?

A

The consumer

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5
Q

When demand is inelastic, who has power?

A

The producer

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6
Q

What is the equation for the price elasticity of demand of both point and arc (η)?

A

η = percentage change in quantity demanded / percentage change in price
or
η = ((Demand - Quantity demanded) / Average quantity demanded) / ((Demand - Price) / Average price)

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7
Q

What kind of slope does a demand curve have and what does this do to the percentage changes in price and quantity?

A

The demand curve has a negative slope so the percentage changes in price and quantity have opposite signs

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8
Q

Do we make demand elasticity a negative number or a positive number?

A

We make demand elasticity a positive number even though it is a negative number by ignoring the negative sign

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9
Q

Does a negatively sloped linear demand curve have constant elasticity?

A

No, it only has a constant slope

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10
Q

How does the demand curve for perfectly inelastic demand look like?

A

It looks like a vertical line

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11
Q

How does the demand curve for perfectly elastic demand look like?

A

It looks like a horizontal line

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12
Q

How does the demand curve for unit elastic demand look like?

A

Like a decreasing curved line (think a c but with a straight line at the top)

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13
Q

What do products with close substitutes tend to have?

A

They tend to have elastic demands

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14
Q

What do products with no close substitutes tend to have?

A

They tend to have inelastic demands

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15
Q

What do narrowly defined products have more of than more broadly defined products?

A

They have more elastic demands

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16
Q

What do products that represent a small fraction of consumers’ budgets tend to have?

A

They tend to have inelastic demand because they are products that do not affect the budget of the given consumer greatly as a daily expense

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17
Q

What do products that represent a large fraction of consumers’ budgets tend to have?

A

They tend to have elastic demand

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18
Q

What is the general result of products that represent a small fraction of consumers’ budgets tending to have inelastic demand and products that represent a large fraction of consumers’ budgets tending to have elastic demand?

A

There is higher price elasticity for more expensive items

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19
Q

The longer the time span, the more ___ is the price elasticity of demand

A

elastic

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20
Q

What does a short-run demand curve show?

A

It shows the immediate response of quantity demanded to a change in price

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21
Q

What does a long-run demand curve show?

A

It shows the response of quantity demanded to a change in price after enough time has passed to develop or switch to substitute products

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22
Q

What is the equation for Total Expenditure?

A

Total Expenditure = Price x Quantity

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23
Q

How does total expenditure change when the price changes?

A

When price falls, quantity demanded increases
When price increases, quantity demanded decreases

24
Q

What does the change in total expenditure depend on?

A

It depends on price elasticity of demand

25
Q

What happens to total expenditure when demand is elastic and price falls?

A

The quantity change dominates and total expenditure rises

26
Q

What happens to total expenditure when demand is inelastic and price falls?

A

The price changes dominates and total expenditure falls

27
Q

What happens to total expenditure when demand is unit elastic and price falls ?

A

The percentage change in quantity demanded equals the percentage change in price and total expenditure remains unchanged

28
Q

What happens to total expenditure when demand is elastic and price increases?

A

The quantity change dominates and total expenditure decreases

29
Q

What happens to total expenditure when demand is inelastic and price increases?

A

The price change dominates and total expenditure increases

30
Q

What happens to total expenditure when demand is unit elastic and price increases?

A

The percentage change in quantity demanded equals the percentage change in price and total expenditure remains unchanged

31
Q

What is price elasticity of supply a measure of?

A

It is a measure of the responsiveness of quantity supplied to a change in the product’s own price

32
Q

When is supply elastic?

A

When quantity supplied is quite responsive to changes in price

33
Q

When is supply inelastic?

A

When quantity supply is relatively unresponsive to changes in price

34
Q

What is the equation of Price Elasticity of Supply?

A

ηs = Percentage change in quantity supplied / percentage change in price
ηs = (ΔDQs/Average Qs) / (ΔDP/ Average P)

35
Q

What is ease of substitution?

A

It is the ease with which a product can be substituted by the customer which is directly related to its value

If the price of a product rises, how much more can be produced profitably depends on how easy it is for producers to shift from the production of other products to the one whose price has risen.

The easier it is to shift from the other products to the one whose price has risen, the more elastic the supply is.

36
Q

What does the short-run supply curve show?

A

It shows the immediate response of quantity supplied to a change in price given producer’s current capacity to produce one good

37
Q

What does the long-run supply curve show?

A

It shows the response of quantity supplied to a change in price after enough time has passed to allow producers to adjust their productive capacity

38
Q

The shorter the time span the harder it is to ____ away from one production to get into another

A

substitute

39
Q

What is the excise tax?

A

It is a tax on the sale of a particular product

40
Q

What does the excise tax do to consumers and producers respectively

A

The excise tax raises the price paid by consumers but reduces the price received by producers

41
Q

What determines the amount of the excise tax?

A

The difference between the price paid by the consumer and the price received by the seller

42
Q

What is the burden of the excise tax dependent on?

A

It is dependent on the relative elasticities of supply and demand

43
Q

The more inelastic labour supply is, the ____ is the burden of the payroll tax on workers

A

higher

44
Q

What is the equation for income elasticity of demand

A

ny= percentage change in quantity demanded / percentage change in income

45
Q

If ny > 0, then the good is a(n) ___ good

A

normal

46
Q

If ny < 0, then the good is a(n) ___ good

A

inferior

47
Q

What are normal goods?

A

They are a good that experiences an increase in its demand due to a rise in consumers’ income

48
Q

For normal goods: If income elasticity is positive but less than one then ___

A

demand is income inelastic

49
Q

For normal goods: If income elasticity is positive but greater than one then ___

A

demand is income elastic

50
Q

What do we call products for which the income elasticity of demand is positive but less than 1?

A

Necessities

51
Q

What do we call products for which the income elasticity of demand is positive but greater than 1?

A

Luxuries

52
Q

The more ___ an item is in the consumption pattern of consumers, the ___ is its income elasticity

A

necessary
lower

53
Q

What are inferior goods?

A

They are goods that have a negative income elasticity because an increase in income actually leads to a reduction in quantity demanded

54
Q

What is the equation for cross price elasticity of demand

A

nxy = percentage change in quantity demanded of good x / percentage change in price of good y

55
Q

What does the change in the price of good y cause to the demand curve for good x?

A

It causes it to shift

56
Q

If x and y are substitutes what happens?

A

An increase in the price of y leads to an increase in demand for x so the demand curve for x shifts rightward

57
Q

If x and y are complements what happens?

A

An increase in the price of y leads to a decrease in the demand for x so the demand curve for x shifts leftward

Microeconomics (14 decks)

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