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EC 201 > Chapter 6 > Flashcards

Chapter 6 Flashcards

1
Q

Elasticity

A

a measure of how much one economic variable responds to changes in another economic variable

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2
Q

Price elasticity of demand

A

the responsiveness of the quantity demanded to a change in price

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3
Q

How is price elasticity of demand measured?

A

percentage change in quantity demanded / percentage change in price

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4
Q

What does PED always generate?

A

A negative number, presented in absolute value

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5
Q

Elastic demand

A

percentage change in quantity demanded is MORE than the percentage change in price PED > 1
MORE responsive to a change in price
LESS tolerant of price increases

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6
Q

Inelastic demand

A

percentage change in quantity demanded is LESS than the percentage change in price PED < 1
LESS responsive to a change in price
MORE tolerant of price increases

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7
Q

Unit-elastic demand

A

percentage change in quantity demanded is equal to the percentage change in price PED = 1

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8
Q

Perfectly elastic

A

the absolute value of price elasticity is equal to infinity, horizontal line

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9
Q

Perfectly inelastic

A

the absolute value of the price elasticity is equal to 0, vertical line

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10
Q

The midpoint formula

A

((Q2 - Q1) / average Q1,2) / ((P2 - P1) / average P1,2)

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11
Q

When do we use the midpoint forumla?

A

to ensure we have only one value of the price elasticity of demand between the same two points on a demand curve

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12
Q

Percentage change

A

yields a different amount depending on if the movement is up or down on the demand curve, issue is eliminated with the midpoint formula

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13
Q

What are some key determinants of price elasticity of demand?

A
  1. availability of close substitutes
  2. passage of time
  3. product - necessity or luxury
  4. definition of the market
  5. share of consumer’s budget accounted for by purchase
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14
Q

Availability of close substitutes

A

more substitutes - higher PED (vending machine)
less substitutes - lower PED (gas)

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15
Q

Passage of time

A

more time passes - higher PED
short-run - lower PED

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16
Q

Product

A

luxury - higher PED (boat)
necessity - lower PED (bread)

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17
Q

Market

A

narrow - higher PED (particular brand of green beans)
broad - lower PED (green beans in general)

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18
Q

Budget accounted for by consumer

A

high % of budget - higher PED (rent)
low % of budget - lower PED (pencils)

19
Q

Total Revenue

A

Price * Quantity

20
Q

If demand is inelastic…

A

Increase in price = increase in total revenue
decrease in price = decrease in total revenue

21
Q

if demand is elastic…

A

increase in price = decrease in total revenue
decrease in price = increase in total revenue

22
Q

at higher prices demand is

A

elastic

23
Q

at lower prices demand is

A

inelastic

24
Q

unit-elastic

A

between elastic & inelastic

25
Q

Revenue

A

total money in

26
Q

Profit

A

money made

27
Q

Cross-Price elasticity of demand

A

percentage change in quantity demanded of one good / percentage change in price of another good

28
Q

If the products are substitutes CPED will be

A

positive (two brands of tablet computers)

29
Q

If the products are complements CPED will be

A

negative (tablet computers & applications downloaded from online stores)

30
Q

If the products are unrelated CPED will be

A

zero (tablet computers & peanut butter)

31
Q

Income elasticity of demand

A

a measure of the unresponsiveness of quantity demanded to changes in income

32
Q

Formula for IED

A

percentage change in quantity demanded / percentage change in income

33
Q

If income elasticity of demand is positive & less than 1 the good is

A

normal & a necessity (bread)

34
Q

If income elasticity of demand is positive & greater than 1 the good is

A

normal & a luxury (high-end jewelry)

35
Q

If income elasticity of demand is negative the good is

A

inferior (high-fat meat)

36
Q

Price elasticity of supply

A

the responsiveness of the quantity supplied to a change in price

37
Q

formula for PES

A

percentage change in quantity supplied / percentage change in price = (always generate a positive number)

38
Q

Determinants of the price elasticity of supply

A

the supply being elastic or inelastic depends on the ability and willingness of firms to alter the quantity they produce as price increases

39
Q

if supply is elastic..

A

the value of price elasticity is greater than 1
MORE responsive to a change in price, price increases less

40
Q

if supply is inelastic…

A

the value of price elasticity is less than 1
LESS responsive to change in price, price increases more

41
Q

if supply is unit-elastic…

A

the value of price elasticity is equal to 1

42
Q

if supply is perfectly elastic…

A

the value of price elasticity is equal to infinity
horizontal line

43
Q

if supply is perfectly inelastic…

A

the value of price elasticity is equal to zero
vertical line

EC 201 (2 decks)

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