Chapter 6

Question 1

Elasticity

Answer 1

measure of how willing buyers and sellers are to changing their quantity demanded; how much buyers and sellers respond to a change in market conditions; big response= elastic; small response= inelastic

Question 2

Price Elasticity of Demand (PED)

Answer 2

a measure of how much the quantity demanded of a good changes to a given change in price; how willing consumers are to buy less as the price rises; all are negative (negative relationship between quantity demanded and price); usually shown in absolute value

Question 3

Substitutes

Answer 3

Goods with close substitutes tend to have more elastic demand; more responsive

Question 4

Necessities

Answer 4

Goods that are necessities tend to have more inelastic demand and luxuries have more elastic demand

Question 5

Time horizon

Answer 5

the longer the time horizon is, the more elastic demand for a particular good becomes

Question 6

Defining the market

Answer 6

the more narrowly we define the market, the more elastic the demand will be; ie: market for cereals is elastic; the market for food is inelastic because there are no other options

Question 7

Perfectly inelastic demand

Answer 7

quantity demanded does not respond at all to a change in price; PED=0; straight vertical line up and down

Question 8

Inelastic demand

Answer 8

quantity demanded responds somewhat but not very much to change in price

Question 9

Unitary elastic

Answer 9

PED= 1

Question 10

Elastic demand

Answer 10

quantity demanded responds a great deal to a given change in price

Question 11

Perfectly elastic demand

Answer 11

quantity demanded drops to zero at any increase in price; straight horizontal curve

Question 12

Total Revenue

Answer 12

the total amount paid by buyers and the total amount collected by sellers; TR= price*quantity

Question 13

Income Elasticity of Demand

Answer 13

measures the responsiveness of quantity demanded to change in income

Question 14

Cross Price Elasticity of Demand

Answer 14

measures the responsiveness of quantity demanded of one good to a change in the price of another

Question 15

positive CPED

Answer 15

price of good y increases, leads to increase in quantity demanded for good x so these two goods are substitutes

Question 16

negative CPED

Answer 16

price of good y increases, leads to decrease in quantity demanded for good x so these two goods are complements

Question 17

Normal good

Answer 17

if your income goes up and your quantity demanded goes up the IED will be positive

Question 18

Inferior good

Answer 18

if income goes up and quantity demanded goes down the IED will be negative

Question 19

Price elasticity of supply

Answer 19

measures the responsiveness of quantity supplied to a change in price; PES is positive; direct relationship between quantity supplied and price