Chapter 4 (2) Flashcards
at the extremes, demand = can be…
►perfectly elastic
►perfectly inelastic
PERFECTLY ELASTIC
the demand curve is horizontal;
► This graph indicates that consumers = very sensitive to price –> b/c demand drops to zero when the price increases even a minuscule amount
PERFECTLY INELASTIC
the demand curve is vertical;
►The quantity demanded is the same no matter what the price is
Elasticity = divided into 3 quantifiable categories:
- Elastic
- Inelastic
- Unit-elastic
ELASTIC
when the absolute value of the price elasticity of demand > 1
► w/ elastic demand –> a given percentage change in the price of a good will cause an even larger percentage change (pg. 113)
INELASTIC
when the absolute value of the price elasticity of demand <1
►With elastic demand –> a given percentage change in price –> will cause a smaller percentage change in the quantity demanded
UNIT-ELASTIC
if the absolute value of elasticity is exactly 1 – that is, if the percentage causes the same percentage change in the quantity demanded.
TOTAL REVENUE
is the amount that a firm receives from the sale of goods & services
AN INCREASE IN PRICE AFFECTS TOTAL REVENUE IN 2 WAYS:
► QUANTITY EFFECT
► PRICE EFFECT
PRICE ELASTICITY OF SUPPLY
is the size of the change in the quantity supplied of a good or service when its price changes
► Price elasticity of supply measures producers’ responsiveness to a change in price
When price rise/fall?
►Rise: producers supply larger quantities of a good
►Fall: they supply smaller quantities
We can describe the price elasticity of supply using 3 categories:
► Elastic: if it has an absolute value > than 1
► Inelastic: if it has an absolute value < than 1
►Unit- elastic: if it has an absolute value of exactly 1
Extreme case:
► Perfectly elastic: (if the quantity supplied could be anything at a given price & is zero at any price
► Perfectly inelastic: (if the quantity supplied is the same regardless of the price)
