Chapter 6 Flashcards
Long run ATC
constructing larger plants will lower the minimum ATC to a point, then larger plants will mean higher ATC
Law of Demand def
Other things equal, consumers will buy more of a product as the price declines and vice versa
Elastic demand
a modest price change can result in a substantial change in quantity
Inelastic demand
a substantial price change can only result in a modest change in quantity
Formula for Price Elasticity of Demand
=% change in quantity demanded of X / % change in price of X
What does the formula of price elasticity of demand measure?
the % change in quantity demanded of X due to a 1% change in the price for X
When is demand price elastic?
when a specific percentage change in prices results in a larger percentage change in quantity demanded
Ed will be greater than 1
When is demand price inelastic?
when percentage change in price results in a smaller percentage change in quantity demand
Ed will be less than 1
When is demand unit elastic?
when percentage change in price results in the same percentage change in quantity demanded
Ed will be 1
When is demand perfectly inelastic?
Ed = 0
price change results in no change in quantity demanded
Demand curve is a vertical line
When is demand perfectly elastic?
Current market price allows producers to sell as much as they need; however, even a small increase will drop demand to zero
Ed= infinite
Demand curve is a horizontal line
What is the formula for total revenue?
TR=P*Q
Total revenue test for when demand is elastic
decrease in price causes an increase in total revenue
Total revenue test for inelastic demand
decrease in price causes a decrease in total revenue
Total revenue test for unit elasticity
decrease in price causes no change in total revenue
Determinants of price elasticity of demand (4)
Substitutability
Necessity vs. luxury
Proportion of income
Time
Substitutability
the larger # of sub. goods available, the greater the price elasticity of demand
Proportion of income
the higher the price of a product relative to income, the greater price elasticity of demand
Luxuries vs Necessity
the demand for “luxurious goods” tends to be more elastic than the demand for necessary goods
Time
the demand of a product is more elastic the longer the time period its under consideration
Habit formation
It may take time for consumers to adjust to price increases for things they regularly buy, but in time they’ll decrease consumption
Product Durability
short run demand for gasoline is more inelastic in the short run than the long run
Law of supply
producers will provide more of a product as price rises and vice versa
Price elasticity of supply
measures responsiveness of the quantity supplied by producers when the product prices change
