Chapter 4 Flashcards
When supply decreases, _____________
When supply decreases, the equilibrium price rises and the equilibrium quantity decreases.
If the quantity demanded is not very responsive to a change in the price, __________________
If the quantity demanded is not very responsive to a change in the price, the price rises a lot and the equilibrium quantity doesn’t change much.
If the quantity demanded is very responsive to a change in the price, ___________________
If the quantity demanded is very responsive to a change in the price, the price barely rises and the equilibrium quantity changes a lot.
If the demand curve is steep, _______________________
If the demand curve is steep, the quantity demanded of the good isn’t very responsive to a change in the price.
If the demand curve is almost flat, _____________________
If the demand curve is almost flat, the quantity demanded is very responsive to a change in the price.
Price elasticity of demand
A units-free measure of the responsiveness of the quantity demanded of a good to a change in its price, when all other influences on buyers’ plans remain the same.
Calculating Price Elasticity of Demand
Price elasticity of
demand = (Percentage change in quantity demanded) / (Percentage change in price)
Calculating Price Elasticity of Demand - Example
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Initially, the price is $20.50 a pizza and 9 pizzas an hour are demanded—the original point. The price then falls to $19.50 a pizza, and the quantity demanded increases to 11 pizzas an hour—the new point. When the price falls by $1 a pizza, the quantity demanded increases by 2 pizzas an hour.
To calculate the price elasticity of demand, we express the change in price as a percentage of the average price and the change in the quantity demanded as a percentage of the average quantity. By using the average price and average quantity, we calculate the elasticity at a point on the demand curve midway between the original point and the new point.
Average Price and Quantity
Notice that we use the average price and average quantity. We do this because it gives the most precise measurement of elasticity—at the midpoint between the original price and the new price.
If the price falls from $20.50 to $19.50, the $1 price change is 4.9 percent of $20.50. The 2 pizza change in quantity is 22.2 percent of 9 pizzas, the original quantity. So if we use these numbers, the price elasticity of demand is 22.2 divided by 4.9, which equals 4.5. But if the price rises from $19.50 to $20.50, the $1 price change is 5.1 percent of $19.50. The 2 pizza change in quantity is 18.2 percent of 11 pizzas, the original quantity. So if we use these numbers, the price elasticity of demand is 18.2 divided by 5.1, which equals 3.6.
By using percentages of the average price and average quantity, we get the same value for the elasticity regardless of whether the price falls from $20.50 to $19.50 or rises from $19.50 to $20.50.
A Units-Free Measure
Now that you’ve calculated a price elasticity of demand, you can see why it is a units-free measure. Elasticity is a units-free measure because the percentage change in each variable is independent of the units in which the variable is measured. The ratio of the two percentages is a number without units.
When the price of a good rises, the quantity demanded ________.
When the price of a good rises, the quantity demanded decreases.
Because a positive change in price brings a negative change in the quantity demanded, the price elasticity of demand is a _______ number.
Because a positive change in price brings a negative change in the quantity demanded, the price elasticity of demand is a negative number.
It is the magnitude, or absolute value, of the price elasticity of demand that tells us how responsive the quantity demanded is. So to compare price elasticities of demand, _________________________
It is the magnitude, or absolute value, of the price elasticity of demand that tells us how responsive the quantity demanded is. So to compare price elasticities of demand, we use the magnitude of the elasticity and ignore the minus sign.
Perfectly inelastic demand
Demand with a price elasticity of zero; the quantity demanded remains constant when the price changes.
One good that has a very low price elasticity of demand (perhaps zero over some price range) is insulin. Insulin is of such importance to some diabetics that if the price rises or falls, they do not change the quantity they buy.
Unit elastic demand
Demand with a price elasticity of 1; the percentage change in the quantity demanded equals the percentage change in price.
Between perfectly inelastic demand and unit elastic demand is a general case in which ____________________________
Between perfectly inelastic demand and unit elastic demand is a general case in which the percentage change in the quantity demanded is less than the percentage change in the price.
Inelastic demand
A demand with a price elasticity between 0 and 1; the percentage change in the quantity demanded is less than the percentage change in price.
Food and shelter are examples of goods with inelastic demand.
Perfectly elastic demand
Demand with an infinite price elasticity; the quantity demanded changes by an infinitely large percentage in response to a tiny price change.
An example of a good that has a very high elasticity of demand (almost infinite) is a soft drink from two campus machines located side by side. If the two machines offer the same soft drinks for the same price, some people buy from one machine and some from the other. But if one machine’s price is higher than the other’s, by even a small amount, no one buys from the machine with the higher price. Drinks from the two machines are perfect substitutes. The demand for a good that has a perfect substitute is perfectly elastic.
Between unit elastic demand and perfectly elastic demand is another general case in which ___________________
Between unit elastic demand and perfectly elastic demand is another general case in which the percentage change in the quantity demanded exceeds the percentage change in price.
Elastic demand
Demand with a price elasticity greater than 1; other things remaining the same, the percentage change in the quantity demanded exceeds the percentage change in price.
The elasticity of demand for a good depends on:
The closeness of substitutes
The proportion of income spent on the good
The time elapsed since the price change
The closer the substitutes for a good, ________________
The closer the substitutes for a good, the more elastic is the demand for it.
Oil as fuel or raw material for chemicals has no close substitutes so the demand for oil is inelastic. Plastics are close substitutes for metals, so the demand for metals is elastic.
The degree of substitutability depends on ___________
The degree of substitutability depends on how narrowly (or broadly) we define a good.
For example, a smartphone has no close substitutes, but an Apple iPhone is a close substitute for a Samsung Galaxy. So the elasticity of demand for smartphones is lower than the elasticity of demand for an iPhone or a Galaxy.
A necessity has poor substitutes, so it generally has an _______ demand.
A necessity has poor substitutes, so it generally has an inelastic demand.