Chapter 6 Flashcards
Economists typically express the elasticity coefficient as an absolute value in order to ____.
avoid ambiguity
You could confuse people by saying that an Ed of -4 is greater than an Ed of -2. So you take the absolute value to say that an Ed of 4 reveals greater elasticity than an Ed of 2.
A coefficient of price elasticity of demand that is greater than 1 indicates that demand is ____.
elastic
How will a specific percentage price change in the denominator impact the quantity demanded in the numerator if demand is elastic?
The quantity demanded in the numerator will undergo a larger percentage change.
Demand is elastic if a specific percentage change in price in the denominator results in a larger percentage change in quantity demanded in the numerator.
If a 4% decrease in the price of coffee leads to a 2% increase in the quantity demanded, the price elasticity of demand for coffee is relatively price ____.
inelastic
If a specific percentage change in price produces a smaller percentage change in quantity demanded, demand is inelastic.
If the percentage change in quantity demanded is less than the percentage change in price, then the price elasticity of demand is ____.
inelastic
If a specific percentage change in price produces a smaller percentage change in quantity demanded, demand is inelastic.
Why will the coefficient for the price elasticity of demand always be a negative number?
Because price and quantity demanded are inversely related
For example, if price declines, then quantity demanded will increases. This means that the numerator in our formula will be positive and the denominator negative, yielding a negative Ed.
A small percentage change in quantity demanded divided by a larger percentage change in price indicates ____ demand.
inelastic
In the price-elasticity coefficient formula, the numerator being greater than the denominator indicates that demand is ____.
elastic
When demand is unit elastic, the percentage change in quantity demanded is ____ the percentage change in price
equal to
If the price in the denominator is changed by a specific percentage and results in a larger percentage change in the quantity demanded in the numerator, demand is elastic and Ed will be ____.
greater than 1
A 5% decline in the price of cut flowers results in a 3% increase in the quantity demanded. Therefore, the demand for cut flowers is ____.
elastic
When demand is relatively price ____, the coefficient for the price elasticity of demand will be less than one.
inelastic
What type of price elasticity of demand results from a relatively small percentage change in quantity demanded divided by a relatively larger percentage change in price?
inelastic
Which of the following would most exemplify perfectly inelastic demand?
A diabetic’s demand for insulin
A mining firm selling its output in a purely competitive market
Drivers’ demand for gasoline
Smokers’ need for cigarettes
A diabetic’s demand for insulin
When a price change results in no change in the quantity demanded, we say that demand is perfectly inelastic. The price-elasticity coefficient is zero because there is no response to a price change.
A product that exhibits perfectly elastic demand has a price elasticity coefficient equal to ____.
infinity
Total ____ is the amount the seller receives from selling a product during some period of time.
revenue
TR = PQ
Total Revenue = Price x Quantity
If product demand is relatively elastic, what will be the effect on the total revenue if the price is increased?
it increases
If demand is elastic, a price increase reduces total revenue. The revnue gained from a higher price per unit will be more than offset by the revenue lost from the lower quantity sold.
If demand is ____, a price decrease will reduce total revenue.
inelastic
The increase in sales does not fully offset the decline in revenue per unit, and total revenue declines.
If the price elasticity of demand is unit elastic, the change in price is ____ the change in quantity.
exactly offset by
When the price elasticity of demand is unit elastic, a change in price will not change total revenue because the percentage change in Qd will be the same as the percentage change in price.
What is the term for the total amount the seller receives from the sale of a product in a particular time period?
total revenue
Demand is more price elastic toward the upper-left segment of the demand curve because the original reference quantity ____.
is small
For all downward sloping straight-line and most other demand curves, demand is more price elastic toward the upper left than toward the lower right.
When price and total revenue move in the same direction along the demand curve, this indicates that demand is ____.
inelastic
In the inelastic range of demand curve D, lowering the price–for example, from $4 to $1–decreases total revenue. Conversely, raising the price in the inelastic range boosts total revenue. In both cases, price and toal revenue move in the same direction, confirming that demand is inelastic.
What are the determinants of price elasticity of demand?
- Substitutability: the more substitute goods that are available, the greater the price elasticity of demand.
- Proportion of income: other things equal, the higher the price of a good relative to consumers’ incomes, the greater the price elasticity of demand.
- Luxuries versus necessities: in general, price elasticity of demand is higher for luxury goods than it is for necessities.
- Time: generally, product demand is more elastic over longer time periods and consumers often need time to adjust to price changes.
All generalizations.
For all down-sloping demand curves, the price elasticity of demand is more elastic ____.
toward the upper left
For all downward sloping straight-line and most other demand curves, demand is more price elastic toward the upper left (here, the $5-$8 price range) than toward the lower right (here, the $4-$1 price range).
Lowering the price of a product along the ____ range of demand will decrease total revenue.
inelastic
Total revenue will decline when the price of a relatively price inelastic product is lowered.
The proportion of consumers’ incomes allocated to a particular good or service is a determinant of ____.
price elasticity of demand
If product demand is relatively elastic, what will be the effect on the total revenue if the price is increased?
it decreases
A luxury cruise will exhibit a relatively ____ price elasticity of demand.
large, greater
Price elasticity of demand is higher for luxury goods than it is for necessities.
A product that is considered to be a necessity would have a ____ price elasticity of demand.
low, lower
What term refers to the ease of switching from one good to another?
substitutability
Product ____ should be considered when discussing time as a determinant of price elasticity of demand.
availability
The availability of substitutes is a determinant of price elasticity of demand, not the availability of the product itself.
The inelastic nature of farm products means that the increased output brought about by a good growing season results in which of the following?
- decreased prices
- increased prices
- surplus total revenue
- depressed total revenue
decreased prices, depressed total revenue
Increases in the supply of farm products arising from a good growing season or from increased productivity tend to depress both the prices of farm products and the total revenues (incomes) of farmers.
What is the cross elasticity of demand?
- measures the sensitivity of consumer purchases of one product (call it X) to a change in the price of some other product (call it Y)
- the coefficient of cross elasticity of demand (Exy) is calculated as a percentage change in the consumption of X to the percentage change in the price of Y
Exy = (% change in Qd of product X) / (% change in P of product Y)
How many products (goods and services) are considered when referring to the cross elasticity of demand formula?
two
Recall that the cross elasticity formula is the % change in Qd for product X divided by the percentage change in product Y. Thus, 2 products are in consideration.
The cross-price elasticity of demand measures which of the following?
* The responsiveness of consumer purchases of one product due to a change in the price of some other product
* The responsiveness of consumer purchases of one product due to a change in consumer income
* The change in the price of one product due to a change in consumer responsiveness for another product
* The responsiveness of consumer purchases of one product due to a change in its price
The responsiveness of consumer purchases of one product due to a change in the price of some other product
Elasticities measure consumer responsiveness to price changes, not price changes due to consumer responsiveness.
For policymakers to achieve the goal of higher total farm incomes, farm output must be ____.
restricted
Because the price elasticity of farm products is highly inelastic, output must be restricted in order for the price to rise. A higher price will result in higher total farm incomes.
Larger positive cross elasticity implies greater ____ between two products.
substitutability
The percentage change in quantity demanded of good X divided by the percentage change in the price of product Y is known as the ____.
cross elasticity of demand
If the income elasticity coefficient is positive, then the good is a ____ good.
normal
For most goods, the income-elasticity coefficient Ei is positive, meaning that more of those goods are demanded as incomes rise.
